Raising

productivity and

Reducing Risks of

Informal

Businesses Expanding Access to Microfinance for

Household (Micro) Enterprises in Africa?

[Wednesday 3 September 2008]

Aleke Dondo with Henry Oketch

P

age2

ABSTRACT

In many African countries, the informal economy provides jobs to millions of the labor

force and contributes from 25 percent to 30 percent of domestic output. Yet, despite

holding much promise for growth and poverty reduction, microfinance is still accessible

to just a handful of small-scale firms and smallholdings in rural parts of Africa. This paper

seeks to answer the question:” what is happening (or not happening) in microfinance to

increase the productivity and reduce the risks of informal businesses of the working poor

in individual African countries, and the impact of such measures." It lays out the current

limitations of the African microfinance system that undermines its potential contribution

to building a more competitive informal economy that can survive in fast globalizing

world.

P

age3

Table of Contents

I. Introduction 5

Table 1. Landscape of African Microfinance Sector at July 2007 6

The importance of microfinance for Africa 7

Application of microfinance by nano enterprises 7

Table 2.2. Typical Investment of Microfinance Loans 8

Table 2.3. Use of Loan by Purpose and Level of Income 9

Obstacles to growth and poverty reduction 10

Table 3. Distribution of MIVs (USD, millions) As At End-2006 13

II. The African Microfinance system 15

Roots and evolution of the system 15

Regional and worldwide distribution of MFIs 17

Table 2.1 Country Distribution of MFIs in Africa, 2007 17

Table 4. Relative Increase in the Number of MFIs 1996-2006 19

Institutional diversity and transformation 20

Table 5. Sample Distribution of MFIs Analyzed by the World Bank in 1995 20

Table 6. Global Landscape of Microfinance Institutions as at End-2005 21

Regional Diversity 22

Gender reach by type of MFI 24

financial products Diversity 24

Table 9. Current Financial Profile of Microfinance Institutions 27

III. Current Limitations, nano firms view 31

P

age4

Institutional perspective 31

Table 3.1. MFIs 3 Top Obstacles to Immediate Priority Goals 34

client satisfaction and perspective of services and Products 35

IV. Improving access and service quality 37

it all begins with the Formulation of a Creative or Innovative Policy 38

The second solution in expanding and deepening access is the mobilization of

adequate resources 41

Role of Standards and Benchmarks 43

The Government has a Role to Play, but it has to be clearly defined 44

Figure 2. Stakeholders role and responsibility 46

Role of Local Authorities 50

Role of Banks 50

Role of Regional Economic Communities 51

Local ownership and participation 52

Key Principles 52

V. Conclusion and Summary 56

5.1 Creating a conducive environment 56

5.2 Improving Coordination and Cooperation 61

5.3 Introducing industry standards and Ratings 62

5.4 Increasing the supply of capital 64

5.5 Lowering cost and Improving Efficiency 65

5.6 Building and Enhancing Capacity 65

5.7 Integration and Regional Cooperation 66

5.8 Establishment of a Regional Capacity Building Facility 72

5.9 Establishment of Regional Wholesale Fund(s)/Venture Capital 68

5.10 Establishment of a Regional/Sub-Regional Rating Fund 69

References & End Notes 70

P

age5

I. Introduction

Although it took roots in Africa almost at the same time as in Asia and Latin

America (in the mid 1970s), microfinance in its modern form evolved more

steadily in the region only after 1993. Now, just some 15 years later, it has

become such an important and critical component of the region’s formal financial

system that the development of all-inclusive financial system is a palpable dream

for Africa.

From South Africa (the region’s most developed economy), to Sierra Leone and

Liberia in West Africa (two of the least developed and war-ravaged economies

just recovering from years of destruction), microfinance is today a system that

provides structures for people previously excluded to save and take loans, in

addition to smoothing consumption and managing various shocks. On this,

Sodokin notes:

“… MFIs provide the only means of tapping resources on both sides of the financial

divide—they are a new class of customer to banks. Between 1999 and end-2005 in the

UEMOA zone, public deposits with MFIs increased seven-fold within the period of 10 years;

rising from CFAF 38 billion to CFAF 250 billion. In the same period, MFIs’ deposits with

banks increased in turn by almost four-fold, rising from CFAF 13 billion in 1996 to CFAF 59

billion in 2003… As long as MFIs lend from an existing capital base; and not just a portion

of deposits held, reserves held by MFIs with banks are unencumbered and can be

leveraged, thus creating new money income…”1

A recently completed study (African Union, 2008) show that Africa’s microfinance

system presently involve more than 8,532 active microfinance institutions of

diverse institutional forms, and presently serves more than 26.5 million people as

of year-end 2006 (Table 1). The size of the industry, as measured by assets, is

roughly $10 billion and employing as many as 100,000 people, which is certainly

far more people than the number engaged by the regions 670 commercial banks.

P

age6

Table 1. Landscape of African Microfinance Sector at July 2007

Sub Region No.

Countries)

Current

Pop.

(millions)

Poverty

rate

No. of

Banks

No.

of

MFIs

Pop. with

bank

account

(%)

Pop.

Served

by MFIs

(%)

GDP

(USD,

Bns))

Clients

(000’s)

Gross Loan

Portfolio

(USD, Mns)

Maghreb Africa 6 161.8 20.4 122 297 25.0 4.1 366 1,753 234.40

French West Africa 10 80.4 58.7 101 1217 15.9 4.5 475 3,071 792.31

Anglophone West Africa 7 184.9 61.3 77 1,330 12.2 3 377.6 3,263 329.71

Central African States 8 80.4 58.7 101 1,217 15.9 4.5 475 3,071 434.31

Eastern Africa 11 266.4 62.4 124 851 12.7 4.2 130.3 3,117 1,843.00

Southern Africa 13 149.6 47.1 142 2671 14.1 2.7 319.2 6,287 1446.74

Total/average 55 923.5 51.4 667 8,532 16.0 3.8 2143.1 20,562 5,080.50

SOURCE: OKETCH, 2007

The rapid growth of microfinance worldwide comes from the belated realization

that, contrary to long-held view of the poor as being bad risk, they are actually

more disciplined savers as well as borrowers. In Africa where the formal financial

sector remains shallow and largely inaccessible to large segments of the

population, the discovery of innovative methodologies to deliver many financial

products to even the poorest sustainably by Professor Muhammad Yunus,

founder and leader of Grameen Bank of Bangladesh found a fertile ground for

rapid growth. This, combined with evidence that small loans make a big

difference, has encouraged many governments worldwide to see microfinance as

potentially powerful tool against poverty, thus its rapid growth.

In the few countries where microfinance is at a more advanced stage of

development, for example Mali and Senegal, the system has actually grown to

serves nearly as many customers as those served by formal financial institutions,

if not more. Moreover, in countries where the formal financial system is

particularly small and underdeveloped like in Mauritania and the Comoros

Islands, the microfinance system even though newer and not as well developed is

already holding a significant share of the total financial sector assets.

In the Comoros islands, for instance, the microfinance system accounted for as

high as 25 percent of the total bank deposits and 20 percent of total bank

credit2, despite having taken roots there only in the mid 1990s. Similarly, in the

Congo Republic after the war, the microfinance sector has evolved fast and by

end of 2006 already accounted for 10.5 percent of the total banking assets or

three percent of the GDP3.

P

age7

The importance of microfinance for Africa

For Africa, where thousands of capital-starved informal enterprises and

smallholder agriculture provide the bulk of total employment4, in addition to

contributing about a fifth to a third of the Gross Domestic Product (GDP), an

improved access to finance through the expansion and further development of

the microfinance system could make a big difference in poverty reduction.

Because of financial exclusion for the greater part of the last 50 years, small firms

in Africa and rural smallholder farmers have been unable to take advantage of

their ingenuity, labor, or knowledge to exploit productive opportunities. Hence,

the evolution and successful development of microfinance in Africa is important

as it holds much promise for accelerated and broad-based economic growth.

Table 1.1 - The Size of the Informal Economy in various major regions of the World in

2000

Region Informal Economy

as a % of GNP

Informal Economy

Size (US billion)

Africa 42 40

Asia 26 531

Latin America 41 353

EIT 38 117

OECD/Europe 18 894

Accumulating evidence over two decades shows that greater access to

microfinance by poor people can result in poverty reduction. Specifically,

literature shows that greater access to microfinance not only leads to increased

saving rates among poor people compared to those without any access5, it also

produces a wider range of positive impacts on the poor. These include household

incomes, spending on home improvement and education, diversification of

income base, and expenditure on food6. Further, as a new type of business

organization in Africa, microfinance is a valuable source of employment and

incomes7’8.

Application of microfinance by nano enterprises

After reviewing 32 early impact studies of microcredit, Sebstad and Chen (1996)9,

for example, found positive increases in average enterprise incomes of between

25 percent and 40 percent, while Pitt and Khandkar (1998) 10; in a study involving

1,800 microfinance clients in Bangladesh, found positive changes in household

consumption, accumulation of non-land assets, and schooling for children.

P

age8

Remarkably, the latter study showed that 5 percent of the clients studied had

crossed the poverty line each year due to impact of microcredit on their incomes

and household consumption. In disaster situations and post conflict areas, too,

studies of impact show that access to microcredit by affected families enabled

them to rebuild their economic activities and livelihoods if designed

appropriately and conveniently delivered11.

Moreover, in addition to being able to expand and diversify their economic base

or meeting needs for which resources were previously scarce, the clients can

become empowered economic agents with improved and more reliable access to

finance, as explained by Prahalad12:

“… Poverty exists not just, because those affected by it lack the means to improve their

wellbeing. Also, because they have limited income, the poor often buy in small quantities;

hence end up paying more for the same goods and services. Because they do not have their

own means of transport, the poor often do most of their shopping locally in smaller stores

that charge more. If they are able to secure a loan at all, it is often at a much higher price

because of limited supply...”

Yet, if they get access to financial services that are more reliable, the poor would

overcome all of their disadvantages, as Prahalad further aptly notes:

“…When the poor are treated as consumers, they can reap the benefits of respect, choice

and self-esteem, besides an opportunity for them to climb out of the poverty trap”.

The more scientific impact studies completed just in the last five years show

exactly how the poor take advantage of financial services provided by

microfinance institutions to protect themselves from economic and social shocks,

as well as invest in previously unavailable opportunities (Table 2.2)13.

Table 2.2. Typical Investment of Microfinance Loans

Options A. In Enterprise B. In Household

1. Adding to working capital Home improvement

2. Diversifying into different

enterprises

Purchasing land or building for non-business

purposes

3. Starting a business Paying for school /education or training

4. Purchasing new

equipment/assets

Medical treatment/insurance

5. Constructing or adding new

business infrastructure, e.g.,

premises, installing power, etc

Loan repayment

6. Business infrastructure

improvement

Meeting daily needs or retirement needs

7. Vehicle purchase

8. Buying household goods

P

age9

9. Ceremony or social expenditure

10. Holiday/leisure expenditure

11. Jewelry purchase

SOURCE: JOHNSTON AND MURDOCH, 2007

As shown in the table, the population at the lower end of the income spectrum

indeed does apply finance to expand or diversify their economic activities or

finance their immediate household or individual consumption needs in case

resources are either inadequate or totally lacking. In this regard, the people at

lower end of the income spectrum apply access to finance remarkably almost

exactly in the same way as the aristocrats (Table 2.3)14. Therefore, given proper

motivation and the means to do so, the people living on less than US$ 1 a day

can easily take advantage of microfinance to improve their lives.

Table 2.3. Use of Loan by Purpose and Level of Income

Loan use Level of Household Income

Households living below the

poverty line

Households

with per capita

income 1 to 3

times the

poverty line

Households with per

capita income more

than 3 times the

poverty line or higher

(a) In business 49 55 57

(b) In household 35 43 45

© Other 23 6 7

Respondents 69 208 271

SOURCE: JOHNSTON AND MURDOCH, 2007

Clearly, as shown in tables 2.2 and 2.3 above, a large part of Africa’s population

currently living in poverty perfectly knows how to work their way out of poverty.

Yet African microfinance programs are notoriously aloof to its main target

customers, who desert services at unacceptably high rates; in East and Southern

Africa, client dropout rates are as high as 40 percent per annum. In most African

countries, due to price gorging, unfavorable terms and conditions, and badly

timed repayment cycles, client retention has been low in spite of the high

marketing cost and basic up-front investment in building social capital1.

Considerable confusion on the appropriate service delivery methodology to apply

1 Some experts estimate that if, for example, a microfinance institution with about 30,000 clients suffers a

dropout rate of 20% a year, that this would translate to 6,000 clients lost every 12 months. Taking an average loan size of US$150 and that in a lifetime a client might take 10 loans, the total future sales lost per year is equivalent to US$9 million. See Inez Murray, April 2001.

P

age1

0

with different segments of the poor, for example the microfinance institutions

overreliance on solidarity group methodology, which requires potential clients to

having a regular (usually household business) source of income, has often

discouraged some potential clients from taking loans and savings facilities.

Occasionally, lack of proper planning, late disbursement of loans or inadequate

assessment of needs has not infrequently encouraged situations where the

proceeds do not necessarily go for business activities.

Obstacles to growth and poverty reduction

Despite rapid growth and expansion, the continent’s microfinance infrastructure

remains weak as compared to systems in other regions. For instance, towards the

end of the 1990s, Africa had 45 percent of all operating microfinance institutions

globally15, while Asia and Latin America each had 36.4 percent and 18.6 percent.

While the number of MFIs in Africa has evolved as steadily as in other parts of the

globe, it has not reached out to as many people as in Asia or Latin America. As of

end-2006, for instance, Africa’s microfinance system was reaching just 11.4

percent of the region’s poorest households, whereas in Asia and Latin America

the system was reaching out to 68 percent and 20.2 percent (Figure 1.1).

With the exception of Egypt and South Africa, access to finance globally is lowest

in Africa, with 16 of the countries in the region having a population penetration

rate of below 20 percent and the rest between 20 percent and 40 percent as of

end of 2005 (Figure 1.1)16. Moreover, while there has been tremendous growth

P

age1

1

in outreach, the recent ratings indicate that on average the region is moving

away from serving the poor. The estimated average loan size relative to income

per person has increased up to 77 percent, from 71 percent in 2002 and even

further up to 89% by 2003. Average loan size per borrower is also on the

increase—now standing slightly above $346.

A few of the transformed or inspiring to transform are clearly drifting from clients

at or below the poverty line. One institution in Senegal now has the highest

average loan sizes in the region; now standing at $ 1,321 per borrower. In

contrast, the MFI serving the poorest clients, with a depth of reach at 20% and

loan size of 50%, exists in Uganda. Generally, East Africa has some of the deepest

reaching MFIs in the region.

In spite of its potential for poverty reduction and enterprise development, and

widespread acceptance and recognition, access to finance in general and

microfinance in particular remains severely limited in Africa. Altogether, just

about 4 percent of the estimated 560 million low-income populations in the

region have any access to finance (Figure 1.2)17.

P

age1

2

The most optimistic of current estimates suggests that not more than 20 percent

of the region’s total adult population have an account at a formal or semiformal

financial institution18. Worse still, just about 1 percent of the population has ever

obtained a loan from a formal financial institution. Access to microfinance also

varies considerably by country and sub-region, as indicated in Figure 1.2 above.

The microfinance system in Tunisia, for example, is reaching far more of the

country’s population than the systems in Senegal, Togo, Uganda, or Ethiopia. Not

only is the number of new microfinance diminishing, but also the number of new

microfinance customers is decelerating. Furthermore, whereas 75 percent of the

microfinance institutions in Asia are concentrated in rural areas, in Africa 65

percent are concentrated in the urban areas. In addition to the limited and

unbalanced outreach, the microfinance system in Africa is lagging behind the

systems in other regions in performance (Figure 1.3).

P

age1

3

With regard to resources for funding growth, Africa is also the region that is most

lacking. It receives the least amount of the nearly $1 billion funds invested in

microfinance yearly worldwide. More than 90 percent of the 120 microfinance

institutions surveyed in Africa by CGAP in 2004 cited lack of capital as the single

most important constraint to their growth19. Even though the level of investment

in Africa’s microfinance system has increased lately from about 1.3 percent of

total funds invested in 2003 to about 6 percent by 2006, the absolute amount of

external capital to Africa is disproportionately small compared to investments in

Asia’s and Latin America’s microfinance systems (Table 3).

Table 3. Distribution of MIVs (USD, millions) As At End-2006

Region Private

funds

Public

investors

All

investors

Total No. of

Recipients

Debt Equity Debt Equity Guarantees

P

age1

4

Eastern Europe & Central

Asia

35.6 73.5 323 68.2 2 502.2 90

Latin America & Caribbean 162.8 67.4 150.9 13.4 63.3 457.9 195

Sub-Saharan Africa 31.2 14.9 1.7 6.1 9 62.9 112

East Asia & Pacific 23.9 1.2 6 3.7 0.9 35.7 64

South Asia 27.7 1 0 5.3 1.1 29 48

Middle East & North Africa 1.8 0 0 0 7 8.8 8

TOTAL 276.9 158 481.6 96.6 83.3 1,096.50 517

SOURCE: MICRORATE, 2006

P

age1

5

II. The African Microfinance system

Roots and evolution of the system

The term microfinance refers to the unique technology that enables the delivery

of sustainable financial services to the world’s low-income populations

conveniently and affordably20. Alternatively, the term refers collectively to the

group of self-sustaining financial services designed and targeted at the socially

and economically disadvantaged populations traditionally excluded by

conventional financial institutions.

What sets microfinance apart from conventional financial systems is its high

degree of flexibility21 and unorthodox approach to credit risk analysis and

management, while still serving a customer class that typically lacks assets22 or

records, and is neither well educated nor informed about financial services

generally. As observed by the 2007 Nobel Peace Prize Laureate Prof. Muhammad

Yunus, the Bangladeshi economist and founder and managing director of

Grameen Bank:

“… Microfinance is a revolution in banking that has succeeded in turning the field upside

down. It has opened doors that for years denied financial services to the poor; when banks

lent to the rich, the microfinance institutions lent to the poor. When banks lent to men,

they lent to women. When banks made large loans, they made small ones. When banks

required collateral, their loans were collateral free. When banks required endless

paperwork, their loans were illiterate-friendly. When clients had to come to the bank, the

microlenders instead went to the clients…”23

The microfinance revolution essentially consists of a set of institutional

innovations aimed at resolving information constraints without relying on wealth

as signal of creditworthiness and ability to pay, e.g. the substitution of collateral

lending with group lending with joint liability or village banking. In addition,

where individual lending methodology is applicable, risk assessment dwells on

the analysis of client character and projected cash flow from targeted investment

project instead of the value of collateral or credit history as important proxy for

ability and willingness to pay. Furthermore, the fact that loan disbursement in

solidarity group lending is staggered among group members, and that

incrementally bigger loan sizes are absolutely dependent on past good loan

repayment, introduces dynamic incentives into the basic model. Other dynamic

P

age1

6

incentives, for instance with individual loans, includes graduated interest rate

rebates or more flexible terms that are conditional to timely weekly or monthly

installments throughout a loan repayment cycle. Yet still other MFIs, depending

on clients’ record, exempt good borrowers from certain standard requirements

when they take future loans.

It was in the mid 1980s, following the World Bank-sponsored Structural

Adjustments (SAPs) for African economies, when the drive for self-employment

through the provision of microcredit and technical support led to the discovery

and later the development of microfinance in the region. This early connection

between micro/small-enterprise development, poverty reduction, and access to

finance remains surprisingly strong to the present time, when the new focus on

how to apply an improved access to finance to enhance the competitiveness of

informal enterprises in a globalizing system of production and commerce.

The period between 1993 and 1997, following the launch of the first-ever

worldwide campaign to scale up outreach in Washington DC, USA, was the critical

point in time. From then on, the idea of providing microfinance on sustainable

terms became a goal in its own right. The period also witnessed the most intense

debate on how best to support enterprise development.

The year 1997 became a major turning point for microfinance when those

advocating for a financial system approach to microfinance development seemed

vindicated by the overwhelming success achieved by specialized, minimalist

microfinance institutions, notably Bangladeshi’s Grameen Bank, as compared to

that of organizations that continued providing other services alongside

microfinance. By 2000, the idea of a financial systems approach to microfinance

development had changed completely to a philosophy and movement that

advocated for commercialization and transformation of microfinance as the only

sure way of meeting the huge unsatisfied demand for services among low-

income populations24. Industry leaders now believe that any further

development of the microfinance system depends primarily on the provision of

market-driven financial products and massive participation of the private sector.

As of March 2006, some 43 microfinance intermediaries, seven of them in Africa,

had transformed and commercialized their operations25. Yet, with the notable

exception of Equity Bank in Kenya26, none of these intermediaries exhibits the

scale, growth, or efficiency promised in the commercialization and transformation

model27. Worse still, not only do these pioneers achieve just modest

P

age1

7

improvement in scale, growth, or efficiency, the results are at a prohibitively high

cost28. Furthermore, there is accumulating evidence of mission drift in these

institutions, a fact that is also slowly dampening expectations about the financial

systems approach29.

Regional and worldwide distribution of MFIs

The present global distribution of microfinance shows a universally high demand

for financial services among the low-income populations. In addition to the

increase in the number of institutions that provide microfinance worldwide — still

frequently pegged at the 1,000 identified in 1996, there has similarly been a jump

in the number of low-income populations served by the institutions.

The first inventory of microfinance institutions conducted worldwide by the

World Bank in 1996 listed close to 1,000 providers, of which approximately 282

were in Africa. Yet Africa alone currently has over 8,532 MFIs (Table 3), even

without including similar establishments from Libya, Mauritius, Algeria, Djibouti,

Guinea Bissau, Sao Tome et Principe, and Seychelles on whom not data was

readily available. Furthermore, for some countries like Kenya, the list excludes all

urban Savings and Credit Cooperative Societies (SACCOS), even though many of

their customers live below the poverty line. The latest data available for some

countries, for example Guinea, Djibouti, Comoros, and South Africa, were for end-

2004, a little outdated. It is therefore safe to assume that Africa’s total

intermediaries actually exceed 8,532 microfinance institutions.

Table 2.1 Country Distribution of MFIs in Africa, 2007

Country Current Pop.

(millions)

Poverty

rate

No. of

Banks

No. of

MFIs

Pop. With bank

account (%)

Pop. Served by

MFIs (%)

Clients

(000's)

Algeria 33.2 25 15 70 30 1 332

Tunisia 10.1 7.4 20 102 42 3.3 1254

Morocco 31.8 19 22 44 25 2.7 1046

Mauritania 3.1 46.7 10 67 16 15 139

Egypt 77.5 17 46 13 10 2.4 750

Liberia 3.6 76 4 81 0.5 0.2 8.2

Sierra Leone 6 80 7 18 5.6 0.7 9

Guinea 9.7 58 7 8 20 1.3 175

Cape Verde 0.4 30 5 6 21 14.5 5

Senegal 12 54 17 833 7 2.4 800

Gambia 1.5 61 6 20 21 1.7 232

Mali 11.7 63.8 12 48 22 5.2 614

Niger 12.5 63 12 170 11 3.2 225.6

Nigeria 149.5 63 23 750 11 0.9 1392

Cote d'Ivoire 17.7 48 17 35 11.6 3.1 690.3

Togo 5.5 66.4 10 45 28 2.4 875

Benin 7.9 64 12 31 3.5 11 656

Ghana 22.4 58 26 435 5.4 1.2 1544.9

P

age1

8

Burkina Faso 13.9 59 11 424 5.1 5.8 1000

Gabon 1.4 6 13 16 0.4 4.78

Central Africa Republic 3.5 81.5 3 36 1.5 1.1 40

Congo, Brazzaville 4.4 52 4 86 4.1 5.1 12

Chad 10.1 81.7 7 214 0.9 0.5 100

Congo, Democratic Rep. 62.7 92.4 3 70 2.7 0.3 54.5

Cameroon 19 48 11 714 5 3.8 476

Sudan 35.1 41.2 23 70 13 2 842.4

Burundi 8.4 81 7 22 34 2.4 200

Rwanda 8.6 59.4 5 230 12 13 375

Uganda 32 65 6 756 7 3 1300

Ethiopia 85.1 46 9 23 1.3 1700

Eritrea 4.9 53 2 9 0.4 25

Somalia 12 43 0 8 0.1 12

Kenya 38.5 56 41 365 10 7.8 2000

Tanzania 40.4 51.1 25 43 6.4 7 653

Comoros Island 0.7 60 3 2 20 5 57.9

Angola 17.3 70 12 9 5 0.1 11

Mozambique 19.7 54 12 50 0.3 0.2 130.8

Malawi 13 70 9 29 3 2.9 380

Zambia 11.5 72.9 17 95 4.5 0.2 50

Zimbabwe 13.2 52 11 257 17.8 0.5 13

Namibia 1.8 34.9 8 223 28.4 3 300

Lesotho 2.4 49 5 43 18 0.8 19.2

Botswana 1.8 31 7 47 24 6 10.8

Swaziland 1.1 69 5 150 35.3 11.3 121.3

South Africa 47.8 50 28 1,354 31.7 8 5514

Madagascar 18.6 50 10 411 2 1.1 307

Seychelles 0.1 6 3 1.8 0.8 80

Africa wide 945 51.5 667 8,532 12 3.4 26,532

SOURCE: OKETCH, 2007

Altogether, these institutions already serve more than 26.5 million people, or

roughly 3.4 percent of Africa’s total population. In terms of numbers, there are

presently 15.2 times more microfinance institutions in Africa than commercial

banks, although banks serve more people, i.e., 12 percent.

The largest number of MFIs is in South Africa, Nigeria, Uganda, Kenya, Cameroon,

Ghana, Senegal, and Burkina Faso. Yet, depending on the total population, the

countries with greater outreach are not necessarily the countries with the largest

number of MFIs. Although South Africa has the most number of MFIs and

microfinance clients; at approximately 6 million people, its coverage is just eight

percent of the population. Similarly, Nigeria, which has about 1.3 million

microfinance clients, has population coverage below 1 percent.

Holding other things constant, for example, randomness and fair representation

of the samples used, microfinance (as measured by the change in number of

institutions involved in its provision) has been more dynamic in Africa than in the

other two regions. According to the 1999 IFPRI Survey30, Asia had 3.7 times more

P

age1

9

institutions of microfinance than Africa. Yet as of end-2006, Asia had only 1.7

times more microfinance institutions. Secondly, ACCION International reportedly

introduced solidarity group lending, the mother innovation and driver of

microfinance development to its present form, in Latin America in 197331.

Therefore, because Africa already had 2.4 times more MFIs in 1999 than Latin

America after just 14 years of its evolution, microfinance must have grown faster

in the region (Table 4).

Table 4. Relative Increase in the Number of MFIs 1996-2006

Region No. of

Reporting

MFIs 2006

%share

of MFIs

2006

Total

customers

2006

%share

customers

2006

%share

of

MFIs

20062

No. of

MFIs

1999[i]

%share

MFIs

1999

Customers

1999

%share of

customers

1999

Africa 971 31.5 7,731,870 7.1 31.5 327 21.8 2,330,753 9.9

Asia & the

Pacific

1,652 53.5 96,689,252 88.3 53.5 1,038 69.2 18,175,161 77.2

Latin

America &

Caribbean

439 14.2 4,409,093 4 14.2 135 9 3,037,041 12.9

Middle East 23 0.7 687,318 0.6 0.7 .. .. .. ..

Total 3085 100 109,517,533 100 100 1,500 100 23,542,955 100

1[i] Lapenu and Zeller, (2001). op. cit.

SOURCE: OKETCH, ADAPTED

The table above helps us to see whether the growth in the number of institutions

involved in the provision of microfinance matched a similar growth within the

institutions, as measured by increases in the number of clients served. It shows,

for instance, that Africa served 9.9 percent of the 24 million clients in 1999, while

Asia and Latin America served 77.2 percent and 12.9 percent, respectively. Yet, as

of end-2006, Asia’s microfinance system had expanded to a point where they

were serving 88.3 percent; i.e., 11.1 percent more customers of the global clients,

while that of Africa and Latin America served just 7.1 percent and 4 percent, a

relative drop in share of customers of 2.8 percent and 8.9 percent. This indicates

that, at the individual institutional level, the African microfinance institutions have

been growing less quickly than those in Asia do, but certainly faster than the

Latin American providers do.

P

age2

0

It is instructive that, whereas Asia’s microfinance system served 12.5 times more

clients in 1999 than Africa’s as of end-2006, the gap in outreach between the two

regions had narrowed to a difference of just 7.8 times more clients. Strikingly,

Latin America’s microfinance system, which is reportedly older and presently the

most developed as a market, has been less dynamic than Africa’s.

The global microfinance system has expanded almost five-hold (4.6 times more

institutions within 14 years) between 1999 when IFPRI conducted the second

global inventory and year-end 2006.

Institutional diversity and transformation

Not only has the microfinance system in Africa expanded in terms of institutions

globally, there is greater diversity in the types of institutions that have emerged

or entered the market. From the pool of institutions identified in 1996, the bank

picked a random sample of 205 institutions for more detailed analysis of their

legal profile, service delivery methodology, gender distribution of clients, financial

products offered, and the depth and breadth of outreach. All the institutions

studied came into existence in either 1992 or later and had expanded their

outreach to the point where they were each serving at least 1,000 people.

Of the many MFIs identified by the World Bank in 1995, just 870 qualified for

further analysis, based on these criteria, and thus provided the universal sampling

frame for further analysis of structure and profile of the microfinance system

then. According to this inventory, and assuming that the sample was

representative of the prevailing situation in East, Central, and Southern Africa,

non-governmental organizations (NGOs) were the dominant type of service

providers (Table 5), accounting for 81.3 percent of all the institutions surveyed.

Table 5. Sample Distribution of MFIs Analyzed by the World Bank in 1995

Region Number of MFIs %Share

East, Central, and Southern Africa 134 17.6

East Asia & Pacific 122 16.1

Western & Central Africa 124 16.3

Middle East & North Africa 30 3.9

Europe & Central Asia 24 3.2

South Asia 98 12.9

Latin America & Caribbean 362 47.6

P

age2

1

Total 760 100

SOURCE: ADAPTED BY AUTHOR

Financial cooperatives or credit unions accounted for 12.5 percent, while just 6.3

percent were retail banks venturing into microfinance. Some 11 years later,

however, the global composition of microfinance institutions reveals major

changes that have occurred since then, including the entry and evolution of

completely new players in the provision of microfinance.

The analysis below is based on data from two partial but nonetheless random

databases (Table 6)32 and is intended to illustrate the changing landscape of

microfinance institutions in Africa and worldwide.

Table 6. Global Landscape of Microfinance Institutions as at End-2005

Charter Type Global % global Africa %Africa

Bank 51 11.4 7 8

Credit Union 30 6.7 16 0.2

NBFI 140 31.4 24 27.3

NGO 198 44.4 39 44.3

Rural Bank 26 5.8

Total 446 100 88 100

SOURCE: MIX-MARKET DATABASE, 2005

The table shows the similarities and differences in the landscape of the

institutions globally and in Africa. NGOs still dominated the provision of

microfinance globally and in Africa in 2005, at 44.4 percent and 44.3 percent

respectively. However, relatively fewer banks and credit unions are involved in

microfinance in Africa as compared to other regions. Previously, NGOs

represented 81.3 percent of all providers surveyed, while credit unions and retail

banks each represented 12.5 percent and 6.3 percent respectively. In 1995 and

1999, no specialized non-bank intermediaries were involved in the provision of

microfinance. This has changed and there is now abundant evidence that new

types of institutions are entering the microfinance market. Until recently, no rural

banks featured as microfinance providers in the earlier inventories.

However, judging by the numbers of providers alone, NGOs are still the leading

providers of microfinance, accounting for 44.4 percent of institutions self-

P

age2

2

reporting to the Micro Banking Bulletin even though there seems to have been a

more rapid growth in the category of financial cooperatives and non-bank

financial intermediaries. With the exception of BancoSol in Bolivia, which was

established in 1992 as the first-ever NGO to transform into a regulated bank, 44

other NGOs have since followed suit, as of March 2006.

Regional Diversity

In addition to rural banks, savings and loan companies, and community banks —

mostly found in Ghana, Nigeria, Sierra Leone, and Tanzania, — Africa is fast

becoming home to varied types of regulated microfinance institutions.

Presently, close to a third of all institutions involved in microfinance in Africa are

non-bank financial intermediaries. In 2005, CGAP conducted a detailed analysis of

300 microfinance institutions in Africa33, which confirmed the changing

landscape (Table 7).

P

age2

3

Table 7. MFIs Type By Sub-region

Central

Africa

Eastern

Africa

Indian

Ocean

Southern

Africa

Total

Type Number of

MFIs

%MFIs

Number of MFIs

%MFIs

Number of

MFIs

%MFIs

Number of MFIs %MFIs Number of

MFIs

%MFIs

Number of

MFIs

%MFIs

Credit

Union

10 56 4 10 8 88.9 2 7.1 32 48.5 56 34

NBFI 3 17 23 55 1 11.1 18 64.3 26 39.4 71 44

NGO 5 28 15 36 8 28.6 8 12.1 36 22

Total

MFIs

18 100 42 100 9 28 100 66 100 163 100

Countries 7

4

3

10

15

39

SOURCE: LAFOURCADE ET AL, 2005

Apparently, as seen in table 7 above, new players exists in all of sub-regions,

although West and Central Africa seem to have relatively more credit unions than

the other three sub-regions. In terms of institutions involved, both the IFPRI and

recent Mix study show that financial cooperatives make up the largest proportion

of the credit volume and savings transactions, while solidarity groups provide the

majority of borrowers. However, it is the village banks and other linkage models

that have higher staff productivity combined with a better depth of outreach than

other MFIs.

More than 95% of the volume of microfinance transactions passes through

regulated institution (bank or cooperative), while less than 2% of the volume of

savings mobilized and savings disbursed are by unregulated15 MFIs, which make

up 60% of the total number of MFIs. The April 2005 Mix study noted the

following facts about Africa’s microfinance institutions:

“… African MFIs are among the most productive globally, as measured by the number of

borrowers and savers per staff member. They also demonstrate higher levels of portfolio

quality, with an average portfolio at risk of over 30 days of only four percent. Still, African

MFIs face many challenges. Operating and financial expenses are high, and on average,

revenues remain lower than in other global regions. Efficiency in terms of cost per

borrower is lowest for African MFIs. Technological innovations, product refinements, and

ongoing efforts to strengthen the capacity of African MFIs are needed to reduce costs,

increase outreach, and boost overall profitability…”

P

age2

4

Gender reach by type of MFI

Regional studies of outreach show significant gender differences among the

clients served by regulated and non-regulated microfinance institutions, and by

poverty profile. For instance, the unregulated MFIs reportedly serve the highest

percentage of women borrowers (at 69%) compared to the regulated (63%), with

the cooperatives serving the least percentage of women at just 50% of total

borrowers. Secondly, using the average outstanding savings and loans as proxy

for clients’ socio-economic profile, the Mix study shows that the unregulated

MFIs are reaching relatively poorer clients than the regulated ones.

Finally, Sergio et al (1998) analyzed the depth of outreach for five MFIs in Bolivia

and the findings from their study suggest that both the design of financial

products and service delivery used by a particular institution have a bearing on

relative impact of microcredit. MFIs using group-lending technology especially

reach poorer clients than those using individual lending methodology.

In spite of these remarkable results, there has been a general decline in growth

and expansion, with clients growing at below 50 percent and the loan portfolio

even less; from 58 percent in 2002 to around 32 percent in 2003.

financial products Diversity

Microfinance institutions worldwide initially offered just one product —

microcredit — thereby leading some commentators to refer to savings as the

“forgotten half of financial services to the low-income populations”. However,

along with the changing landscape of microfinance service providers discussed

above, there are now more products on offer to these populations. These include

savings and micro-insurance financial products (Figure 2). Yet, by far, microcredit,

or simply enterprise loans, remains the oldest and flagship of microfinance

institutions worldwide.

P

age2

5

Consumer loans

Housing loans

Enterprise loans

Savings accounts

Time deposits

Pensions

Life insurance

Health insurance

Burial

Remittances

Figure 2. Percenatge of African MFIs (N=94)(as of November 2007)

For credit unions and most MFIs based in Western Africa, voluntary savings and

individual loan products were the earliest, dating as from 1993 in Benin, Burkina

Faso, and Mali. However, in the Eastern African sub-region, solidarity group loans

were among the earliest products. Asset loans or lease financing are among the

newest, having been introduced for the first in 1991, but picking up just in 2003.

Remittances or money transfer entered the market for the first time in 2004, but

has grown fast since 2006. The newest types of loans currently provided in the

African microfinance market include credit to purchase shares or investment

loans, livestock purchase loans, and SME loans. Among other notable products

P

age2

6

making a debut in the African market are village phone loans (so far found only

in Uganda), food/security farming loans in Ethiopia, Kenya, and many parts of

Western Africa, education loans, and emergency loans. So far, credit life insurance

and funeral or burial insurance cover financial products are available only in the

Southern part of Africa. In Western and Eastern Africa, particularly in Kenya, the

microfinance institutions also provide varied types of savings accounts.

The strong demand, hence relevance of the financial products, explains the rapid

growth of the microfinance sector in Africa. As an example, the number of

microfinance institutions operating in the UEMOA zone expanded by nearly eight

times to 1,552, between 1993 and 2006 (Figure 3.1). Likewise, there has been

rapid growth in the volume of deposits and loans made by these institutions,

suggesting the presence of a strong demand and the relevance of microfinance,

as further illustrated in following section.

P

age2

7

Lastly, while there were hardly any microfinance intermediaries in Africa that had

an outreach above 50,000 clients a decade ago, 38.1 percent of the

intermediaries currently have an outreach that exceeds 100,000 customers

each34.

Outreach and Financial Performance

This section draws from 89 ratings of African microfinance institutions between

2001 and 2007 and several new and old surveys of the sector (Table 9). Because

they are more objective, rating reports provide reliable benchmarks for

comparative analysis between institutions. Ratings are also good in revealing

important industry trends.

In the past three years, the African microfinance system has scored significant

results in several areas, for example, declining average expense ratio, which

suggests an increasing operational efficiency. Cost per loan has also dropped

significantly to within 30 percent of outstanding loan portfolio balances, while the

average operating self-sufficiency has improved from 110 percent as of

December 2002 to 117 percent a year later. In addition to the rapid growth and

expansion of microfinance in Africa since the mid 1990s in terms of institutions

and products, there has also been an impressive growth in volume at the

individual provider level (Figure 3.3), as earlier discussed.

Table 9. Current Financial Profile of Microfinance Institutions

P

age2

8

Region Total outlets Rural outlets Age Lending portfolio (US$)

Africa

Average 42 31 1993 22,890,491

Median 21 14 1995 7,694,700

Sum 1,250 893 709,605,233

Americas

Average 14 13 1993 115,662,750

Median 10 8 1996 7,000,000

Sum 307 286 2,660,243,250

Asia

Average 279 286 1991 154,426,210

Median 15 12 1992 3,384,565

Sum 9,776 8,873 41,015,081,458

All INAFI,

sample

Average 130 123 1992 92,311,624

Median 16 11 1994 7,236,510

Sum 11,33

3

10,05

2

7,384,929,941

Global 17,62

9

15,63

6

1993 11,487,668,797

SOURCE: INAFI AFRICA, NOVEMBER 2007

The table above gives a sense of the financial performance so far achieved by the

microfinance institutions in Africa and a comparative global picture.

Specifically, using outstanding loan balances as one of the key measures, the

table shows how the typical African MFI is handling as much volume of credit to

the low-income populations as its peers in the Americas. They also seem to

perform even better than the typical microfinance institution in Asia. Similarly, if

the number of outlets represents a measure of handling capacity, then the typical

African MFI seems to have a wider geographical coverage of low-income clients

than do its peers in Asia and Latin America. The same generally good

performance using these two key measures is also evident by sub-region.

P

age2

9

Take the case of the West Africa sub-region where we have decade-long time

series data at the country level (Figures 3.1 and 3.2, above), for example. In 1993,

when microfinance came under financial systems regulation in the UEMOA zone,

the system served under half a million clients. However, 14 years later, it now

serves 7.8 million low-income households and individuals in the eight countries.

This is about twice as many clients served by the decentralized financial system in

2004, up from the 4.3 million customers in 2000 and nearly eight times the

number of clients served as of year-end 2006. The total volume of deposits and

credits channeled through the system stood at $750 million and $645 million,

respectively, as of end-2006 (Figure 3.3).

By scale, the biggest MFIs in the region serve at least more than 40,000 active

loan customers. The average outstanding loan portfolio as at end of 2003 was $7

million hence suggesting tremendous growth in lending volumes from $5.1

million in 2002; as the beginning of the period, Gross portfolio for the region

stood at $ 3.4 million. Today some of the biggest MFIs in the region, mostly the

group of transformed or mature organizations (e.g. ACEP and K-REP bank); have

gross portfolio exceeding $ 20 million. The smaller MFIs in the region hold a

combination of between $800,000 and 5,000 active clients.

At the institutional level, the 20 largest MFIs in Africa (as measured by number of

borrowers), accounts for more than 71% of the total outreach. Similarly, the top

20 MFIs in size (as measured by gross loan portfolio) accounts for nearly 80% of

the total regional portfolio, and therefore the majority of MFIs in the region are

reaching just a handful of clients. This huge imbalance in outreach is due to

P

age3

0

differences in the MFIs access to resources and legal status. The biggest of the

MFIs happens to be savings-led and member-owned institutions, for example

FCPB in Burkina Faso, DECSI in Ethiopia, and Kafo Jiginew in Mali.

According to the IFPRI survey, Asia accounts for the largest volume of savings

and loans and employs the largest number of staff. Asia’s MFIs also reportedly

had lower personnel costs than those in Africa and Latin America.

Due to poor infrastructure, undiversified economies, high transaction costs, and

because of poor and illiterate microfinance clients, African MFIs have low staff

productivity. However, as a percentage of GNP per capita, African MFIs still

handle relatively larger loan sizes than Asia, but not Latin America.

The IFPRI report attributes the relatively high rural outreach in Asia to the densely

populated irrigated or fertile areas widely available in the region.

P

age3

1

III. Current Limitations, nano firms view

Institutional perspective Despite the outlined developments, the microfinance system in Africa has yet to

realize its full potential. Even after growing rapidly and extensively throughout

the region since the mid 1990s, access remains limited.

As of December 2006, for instance, just about four percent of the region’s

potentially eligible population had services. Secondly, the market is highly

concentrated in a small number of leading institutions and countries. In the entire

region, the top 10 providers cater to nearly two thirds of the entire market35. The

imbalance is evident even among the countries, with Ethiopia alone accounting

for six of the top 10 biggest microfinance institutions in Africa in 2007. Next in

line is Senegal and Burkina Faso.

In the CEMAC zone covering seven Central African states, almost two thirds of all

microfinance institutions and volumes of credit and deposits are concentrated in

Cameroon36. In many of the 53 AU member states, often just two to three

players control a high share of the total national markets; of between 60 percent

and 80 percent. In Malawi, for instance, a single microfinance institution (the

MRFC) controlled as much as 80 percent of the national market in 2006. In Mali,

during the same period37, three of the biggest microfinance institutions —

Nyesigiso, Kafo Jiginew, and Kondo Jigime — controlled 60 percent of the entire

national market, taking up 75 percent of deposits and 50 percent of the total

outstanding loan portfolio.

By volume and sub-region, the microfinance system in the AU member states is

least developed in the CEMAC zone. More than 340 microfinance institutions

closed shop38 after failing to meet newly introduced licensing requirements by

the deadline of February 200539.

The inevitable conclusion from this analysis is that, while Africa’s microfinance

system has acquired a considerable level of professionalism over the past two

decades, it still lags behind other regions in several fundamental areas.

First, the total outreach remains insignificant and a largely urban phenomenon.

Second, although some linkages are starting to emerge between conventional

banking and non-banking financial institutions and microfinance institutions —

P

age3

2

especially in a few countries like Mali, South Africa, Kenya, and Tanzania — the

market as a whole remains fragmented and uncoordinated while access to funds

for intermediation is still a major problem40. In many parts of Africa,

microfinance institutions rely on domestic commercial loans to grow their loan

portfolios. This is short-term, expensive, and largely dependent on continued

good personal relations between managers.

Equity and debt capital remain elusive, probably because many microfinance

institutions are not financially self-sustainable. The cost of access to finance

provided by microfinance institutions, at upwards of between 30 percent per

annum to as high as 86 percent, is too high for the low-income populations. In

many of the AU member states, interest rates on borrowed funds roughly

average 43 percent a year, with a median interest rate of around 29 percent.

P

age3

3

Other pressing problems among African MFIs include high client dropout rates,

typically ranging between 20 percent and 25 percent annually. In Mozambique,

for example, annual client dropout rates of between 30 percent and 40 percent

are common41, while in the Eastern Africa region, annual client exit rates of as

high as 60 percent occur widely. African microfinance institutions exhibit highly

uneven levels of performance, even those of the same age, size, or legal form.

This underscores the lack of generally accepte90- operational standards for

practitioners within the region. In addition to this baffling wide variance in

performance — and in spite of progress made in developing people and systems

over

the

past

three

decades—the microfinance system in Africa has failed to attract foreign and local

investment capital to finance growth and expansion.

Not surprisingly, most African microfinance institutions have failed to develop

institutionally or expand outreach significantly, primarily because of lack of

adequate capital (Table 3). Lack of adequate capital is the single most important

P

age3

4

factor why so few African microfinance institutions have become both

operationally and financially self-sustaining (Figure 1).

Without adequate resources to finance their growth and satisfactorily meet

customer needs for services on demand, many African microfinance institutions

have traded off essential investments for upgrading management systems and

enhancing human and institutional capacity with loan funding. Because of this,

the institutions have failed to match current expansion with greater capability,

thus facing the risk of higher loan delinquency and default.

Table 3.1. MFIs 3 Top Obstacles to Immediate Priority Goals

Obstacles Ranking Situation

1 2 3 Mentions Percentage

Lack (and where available, high

cost) of capital

14 7 7 28 29.8

Lack of adequate staff and

institutional capacity

4 9 11 24 25.5

Difficult operating environment 4 7 14 25 26.6

High risk and cost of lending 3 1 0 4 4.3

High customer exit rates 3 2 1 6 6.4

Other 0 1 0 1 0

Total 29 29 36 94 100

As a % of all first-place rankings 48.3 24.1 19.4

As a % of all second-place

rankings

13.8 31 30.6

SOURCE: OKETCH AND MIRERO, 200442

In the West and Central Africa sub-regions, declining portfolio quality has actually

become a major threat43, forcing many institutions in Niger, Mali, Guinea, and

Benin to slow down or suspend their lending operations altogether. In some

countries where microfinance regulation is new, for example in Uganda, declining

loan portfolio quality is threatening to reverse 30 years of progress in developing

sustainable financial services for the poor44.

In Africa and other continents where microfinance blossomed unexpectedly fast

in the past quarter-century, the initial focus of donor support to specific projects

and institutions overlooked the long-term view of microfinance as a potentially

self-sustaining mechanism. This prompted a hurried shift of support away from

individual projects or institutional development needs. The new focus of

P

age3

5

microfinance development then became the urgent need to build the prospective

industry’s infrastructure. This achieved less than satisfactory results because the

strategy failed to address the missing retail and institutional capacities45.

However, the country-level networks or associations of microfinance service

providers emerging in most of the 53 AU member countries are trying to address

the institutional- and industry-level capacity constraints. These professional

membership practitioner associations only acquired a serious institutional

outlook in the past six to seven years and are themselves still weak,

notwithstanding efforts by the World Bank and Women’s World Banking 199841

initiative to strengthen them. In the absence of such strong networks, therefore,

much of Africa’s microfinance industry grew in the past without any proper

coordination or cooperation among the market players. In fact, the industry still

lacks a common vision for the future. This also explains much of the current

confusion and disagreements about what should be the proper role of the state

and some considerable confusion about suitable legal and regulatory settings for

microfinance development in Africa.

client satisfaction and perspective of services and Products

Access to finance remains a problem for

informal enterprises due to several factors. First,

while there has been some improvement in

access due to the development of microfinance,

large parts of Africa are still without MFIs or

bank presence. Rural areas in particular are still

badly off, as many MFIs chose to work in urban

areas and in areas where the physical

infrastructure for communication and

transportation is better developed.

Secondly, the pressure on MFIs to become self-

sustaining in the absence of initial donor

funding, has made them avoid serving the very poor customers; many of these

happen to be women and rural informal businesses. He same pressure partly

explains the decision by MFIs to charge very highly for their services, and this has

driven many clients away. In Zambia, for instance, a 205 survey indicates that at

least 5 percent of the households have accessed microfinance at one time or

another, yet just 1.5 percent were still active clients after many are driven away.

Ban

ked

Oth

er

form

al

Info

rmal

on

ly

Un

-serv

ed

Financial

Deepening

South Africa 5

0%

7

%

9

%

3

3%

Lesotho 4

6%

1

6%

4

%

3

5%

Namibia 5

1%

3

%

1

%

4

5%

Botswana 4

1%

1

1%

5

%

4

1%

Kenya 1

9%

8

%

3

5%

3

8%

Zambia 1

5%

8

%

1

1%

6

6%

P

age3

6

In addition to the high cost of services, many dropouts and even some active

clients find the available services not appropriate enough; loans are typically

group-based, require regular weekly or monthly repayments, and have very short

tenor that at times are at great odds with needs and abilities of the clients.

P

age3

7

IV. Improving access and service quality

The primary concern in trying to develop a microfinance system in any part of the

world is how to reach millions of people financially excluded on sustainable

terms. The second concern is ensuring that those who get access to finance

actually invests it wisely and effectively to resolve both their short term and long-

term needs, for instance the desire of self employed entrepreneurs to expand

and/or improve their businesses and, thus, improve their incomes.

Ultimately the success of a nation in developing a microfinance system for its

poor and financially excluded population must be judged on the basis of

sustainable improvements to their welfare/ standards of living. Inevitably, this is

only achievable by increasing outreach, resource mobilization, cost coverage, and

dynamic growth. In this connection, therefore, this section tries to deal with the

following issues:

What does it take to build a successful microfinance

market in Africa that fulfils its role as desired by

society?

What role should the governments play in expanding

and deepening outreach?

What values should guide investors, on the one hand,

and microfinance institutions, on the other hand, as

they seek to increase outreach and become long-

lasting and self-sustaining alternative financial

institutions for the currently excluded rural and urban

poor?

Firstly, in seeking to advance the development of microfinance in Africa, each

country should pursue the following five priority goals:

1. To increase the number of poor families and

individuals with access to finance.

2. To improve and increase the distribution of

microfinance to rural areas, especially to smallholder

P

age3

8

farmers and the more disadvantaged social groups,

e.g., women and the youth.

3. To improve and enhance the social and economic

impact of microfinance, especially maximizing its

potential contribution towards achieving the MDGs by

also providing complementary services.

4. To increase the share of local savings invested in

financial assets by the rural and urban poor, and

increase the share of local deposits mobilized and

invested towards expanding and diversifying the rural

economy.

5. To increase backward and forward linkages between

formal and informal financial systems, thereby help

increase and improve the supply of various financial

services to the poor, and enabling job creation, trade,

and investment to flourish.

it all begins with the Formulation of a Creative or Innovative Policy

Among the measures to achieve these five priority goals include encouraging

(through policy and other incentives) the provision of suitable financial products,

i.e., products that meet the needs of poor people.

Microfinance clients not only want permanent or reliable services, they also care

about price and want quality services at reasonable prices. Furthermore, in

addition to access to finance, the poor in their endeavor to improve livelihoods

and well-being may require other equally important non-financial services, e.g.

access to reliable markets for their goods/produce and services or getting fair

price for their output, etc. Therefore, an improved access to microcredit, for

instance, needs to be accompanied with appropriate non-financial services; these

need not to be provided by the same agency, but can be arranged between

different specialized agencies. In this regard, therefore, policy geared towards

advancing the development of microfinance in a particular country ought to

outline areas where such strategic alliances or partnerships would make a

difference in lifting people out of poverty.

Similarly, the absence of linkages between formal financial system and

microfinance institutions can thwart growth of a dynamic and vibrant sector.

P

age3

9

Where government has developed national microfinance policy and regulatory

environment—and also established strong agencies to coordinate and supervise

the development—it has been relatively easy to mobilize local and external

resources for the development of the microfinance sector. The presence of strong

national microfinance practitioner’s associations or networks, for example the

ones existing in Ethiopia and Senegal, can also encourage many microfinance

institutions to aim for higher standards and superior performance, through

exchange of ideas, collaboration in training, and self-monitoring. Actually, it is in

countries such as the two mentioned above where many practitioners face

relatively few hurdles in tracking and regularly reporting their performance, and

where more MFIs are engaging ratings services, thereby improving transparency

and wining the confidence of more investors to enter their market. Thus,

cooperation, coordination, and dialogue among various market players are

essential elements of good sector development practice, which policy can

promote and influence.

However, in the process of policy making and regulation of microfinance,

governments must engage closely with the providers in dialogue and discussion

of market requirements/rules. Similarly, at another different level, governments

must also effectively engage donors, other development partners, and the private

sector to succeed in mobilizing the resources needed to expand and build the

industry. In this regard, it is necessary for government to coordinate and

encourage cooperation and partnerships among different stakeholders through

appropriate public policy and clear definition of roles for each group.

Furthermore, to ensure that providers are market-driven, it is necessary to have

policy that encourages and permits a wide range of financial products demanded

by customers at the right price, so that access to services is sustainable in the

long-term. Yet this also means that providers must remain dynamic to evolve in

tandem with changing customer needs and the market in general. In this regard,

considering that lack of adequate, reasonably-priced, and appropriately

structured capital is currently a major constraint to microfinance market

development, policy should make or encourage the provision of savings as one

of the priority services, besides creating adequate measures to protect

depositors.

Accordingly, financial sector policy should encourage and allow institutions

involved in microfinance to mobilize liquidity right from the grassroots. Similarly,

P

age4

0

because the microfinance clients themselves have vested interest and capacity to

save and invest, both policy and corresponding regulatory framework should

encourage and provide room for the poor to invest in microfinance institutions,

as well as promoting and encouraging their participation in domestic and

regional capital markets.

Yet, the fact that financial intermediation is a risky business means that

microfinance institutions must be professionally managed; by people with high

integrity, knowledge, and skills in serving the poor sustainably. However, to guide

and ensure that microfinance institutions are managed professionally, standards

and benchmarks to inspire excellence are also required, and these should be

incorporated in policy and regulatory framework. A confident and well trained

human resource base is the ultimate solution to building market-driven

microfinance institutions that grow and evolve with their customers’ needs.

Hence, in the area of human resource development, policy must push for strong

management and leadership, which invariably determines the success of any

enterprise; and an MFI, is in every sense, an enterprise. Secondly, at the level of

staff who provide the primary contact between customers and MFI, there is a

continuous need for credit officers and operations staff especially to constantly

upgrade their skills and knowledge-base just to keep pace with developments in

the field. On this matter one specialist organization notes46:

“… Recent trends in microfinance—fast growth, change, stiff competition—have made

achieving the mission more challenging than ever. Given these circumstances, MFIs need to

reinforce their strategic management practices: more systematic planning and

management of strategy will enhance their success. Thus effective management should be

(a) inspired and guided by the mission, the most vital aspect of any organization; (b) be on-

going and integrated into every level of the organization, informing and strengthening all

management practices. A continuous assessment of the strategy’s implementation, and sue

of results, will help managers to prioritize and improve decision-making, (c) involve

everyone; strategy is the result of hundreds of activities. Therefore, an MFIs’ strategy

cannot be left to only a few people at the top o the organization; it should be both

understood and executed by all the employees, and (d) lastly, facilitate change

management: because change is inevitable during pursuit of the mission, it is important to

have set of tools and practices to facilitate smooth transitions…”

P

age4

1

Regrettably, many transformed MFIs have tended to place too faith in newly

introduced banking technology and knowledge—even retrenching and replacing

seasoned microfinance staff with traditional bankers—only to discover significant

client exists because of inevitable differences in organizational culture and service

orientation. Several such MFIs have rushed to serve new markets, e.g., individual

SME loans, with disastrous results because they were unprepared. Equally

important is the challenge on management to keep refining, updating, or

developing more appropriate management systems in tandem with changes in

demand and market conditions; at any one time, management systems should

enable the workforce to identify and manage risks effectively. In fact these

systems should enable the workforce to also assess their institutional

performance and continued relevance in the market place, thus it is important to

have these continuously improved and upgraded in tandem with growth and

market dynamics.

The second solution in expanding and deepening access is the mobilization of

adequate resources

So far, the opportunities in modern microfinance are just unfolding. So there is a

general lack of investors or capital for market development. In addition, lack of or

insufficient promotion of the sector –combined with lack of suitable policy—has

contributed to poor resource mobilization.

Most of the existing MFIs in Africa were established at a time when there were no

standards or benchmarks to inspire excellence. In spite of recent improvements in

policy environment and greater awareness of the potential gains from

microfinance, lack of basic standards or benchmarks means that providers have

not felt the pressure to excel. Hence, creating and promoting industry standards

and benchmarks is an important intervention that could drive up performance to

a higher level of efficiency and professionalism, as mentioned before.

In many countries where microfinance has developed relatively well, there has

been a broadening of partnerships between governments and the private sector.

Moreover, the role of subsidies in facilitating institutional and market

development is widely appreciated. However, dependence on subsidies can

undermine the emergence of strong, long-lasting institutions if not well-

coordinated and managed. As a matter of good practice, subsidies should be

selective and should be provided only when they are high-value adding, or when

they have a clear chance of changing attitudes and behavior. In considering

P

age4

2

subsidies, it is important for private-public sector partnerships to include both

institutional and market development priorities, since balanced growth is possible

only when there is a good match between capacity and the demand for services.

In this regard, African can learn much from South Africa, where the government-

promoted Black Economic Empowerment (BEE) Financial Sector Charter47, has

inspired the private sector to innovate and seek ways of reaching the still

financially and economically excluded population with new products and delivery

systems—including wide scale application of technology.

For Africa, where the market is relatively young, it would be good practice if more

of the resources mobilized through public-private sector are channeled as

subsidies into building industry standards, national microfinance networks, and

management/leadership. As observed by one Jean-Luc, Camilleri (2005):

“… It is only the well managed MFIs that are likely to meet the needs of the huge, currently

financially excluded population. At the stage of experimentation, the role of some NGOs

has been crucial. But today, MFIs must be more professional so that they can increase their

impact and reach more of those still without access. It is more efficient 9and cost-effective

for poverty alleviation) so use subsidies in strengthening the MFIs whose capacities for

intervention is high enough to respond to the needs of the most dynamic micro/small-scale

enterprises…” 48

The role of the public sector in developing the market, encouraging competition,

and attracting investors to serve neglected or difficult to reach areas cannot be

ignored. Yet government involvement is more effective through public-private

partnerships. Where the public sector finds it necessary to get involved in the

provision of microfinance, it is more effective if it does so by sub-contracting or

outsourcing the responsibility to specialized and experienced firms.

In conclusion, best practice in the provision of microfinance means full cost

coverage, market-driven approach to service provision, scaling up operation (or

being able to expand outreach at low marginal cost, and making rational

economic decisions. It requires competent, committed managers and workforce

that also have high levels of integrity and ability to relate to ordinary people.

In making difficult choices, managers must consider risk and cost, as well as the

long-term survival of their enterprises, i.e. choices must be made on sound

business principles, while keeping in mind poverty reduction as the ultimate goal.

Subsidies will continue to be relevant, but these should be allocated wisely only

P

age4

3

to high-value adding initiatives, such as new product development or

strengthening market and institutional capacity which clearly promise change in

performance expectations.

Role of Standards and Benchmarks According to ADA, viability of microfinance institutions rests on two pillars: the

provision of sustainable financial services to vulnerable populations and

professional and accountable management of resources. For there to be

progress, therefore, there is a need for a highly trained and disciplined work force

and standards and benchmarks against which institutions can assess if they are

using their resources well. Based on standards, individual microfinance

institutions can then objectively gauge their performance against industry

leaders. The purpose of setting benchmarks for a particular industry is to align

institutional goals with both internal and external best practices. Further, while

meeting its own internally set targets, an organization needs to move ahead

within the industry if it is to remain relevant and dynamic in a changing business

environment. In view of the uneven performance of African microfinance

institutions, the introduction of standards and benchmarks would be vital.

Generally, well run microfinance institutions try to excel in reaching more and

poorer customers while minimizing risks and the cost of doing so. In addition,

such institutions try to generate adequate revenue while also seeking to minimize

costs and improve their level of efficiency and productivity. Five areas have

emerged as being critical to the success of microfinance institutions globally.

1. Scale of operation or outreach.

2. Collection efficiency and portfolio quality.

3. Operational efficiency and staff productivity.

4. Profitability and growth.

Although there are standards and benchmarks for microfinance globally and at

the regional level, these rely on small samples of microfinance institutions that

currently voluntarily reports to the Mix Market or extracted and collated from

rating reports. The first-ever African benchmarking, discussed in February, 2001,

in Entebbe, Kampala, was commissioned by INAFI Africa and developed by

MicroRate Africa. Initially, this was based on just 11 rating outcomes of MFIs who

were members of the INAFI Africa. The number of African microfinance

P

age4

4

institutions rated as of December, 2006, was 89. As more MFIs voluntarily reports

to the Mix Market and undergo rating, it should be possible to improve the

African benchmark, which had expanded to 25 MFIs by end of 2006. Some

resources would be required to sustain rating and upgrade benchmarks as part of

the effort to build microfinance market.

The Government has a Role to Play, but it has to be clearly defined

The success of government support in developing microfinance depends

primarily on whether this involvement is motivated by concern for quick political

gains, or by the long-term public good49. Bate (2008) notes:

“…Government intervention in microfinance could bring funds and services to millions of

poor people and improve the institutional framework of the industry—at the same time; it

could deliver a knockout punch to private MFIs...”50

On the positive side, the long running failure of formal financial systems to serve

the vast majority of Africa’s financially excluded population, despite many

attempts by the public sector to make it competitive enough and socially

responsible, is probably the first and main reason for governments’ involvement

in the development of the sector. It would appear that, with more than two

rounds of unsuccessful financial sector reforms to expand outreach to the poorer

sections of the society in the past 20 years, many governments across the region

are finally convinced that an alternative system specifically targeting the excluded

population is the best strategy forward. Yet many critics dismiss the public

sector’s growing activism in the development of all-inclusive financial systems as

lacking any ideological goal, other than to get the costs of financial services down

in order to reach the largest number of poor people in the shortest time

possible51. In making this claim, however, the critics also ignore the fact that lack

of resources has been a fundamental constraint to expanding and deepening

outreach, especially in Africa. They also ignore the fact that both foreign direct

investment and official development aid is insufficient, precisely because Africa’s

evolving microfinance system is structurally weak and needs to be strengthened

first to attract private sector capital. In defense of the public sector, therefore, one

can list governments’ growing concern for slow expansion and deepening of the

otherwise potentially valuable microfinance system, in achieving many of the

regions current development goals.

Other critics see, correctly, the increasing involvement of governments in the

development of microfinance as a negative consequence of its own success.

P

age4

5

Indeed, the apparent success of microfinance seem to have convinced some

governments that it is a panacea for all their problems, hence often hasty and ill-

thought intervention. Along these lines52, critics fear a repeat of the experiences

in the 1970s and 1980s, when governments were carried away by prospects of

agrarian revolution and got entangled in popularizing credit programs through

subsidies that turned out to be unsustainable and generated a culture of not

paying. While this fear is not entirely unfounded, it is also true that many

governments appreciate microfinance more especially because of its potential to

be a self-sustaining service, yet one which can reach the most vulnerable and

socially disadvantaged populations (even if they live in isolated rural areas).

Even the criticism of government-launched programs by CGAP, cited below, is

just partly correct, and not entirely valid:

“… The potential damage of these populist approaches in Latin America is particularly

worrisome because a number of countries have large and sustainable private microfinance

sectors…"53

In many countries (even in Latin America), access to microfinance remains

seriously limited and pricey54, while at the same time there are no signs of

improvements to competition, notwithstanding the seemingly good returns55 or

rapid expansion and growth of the sector in the region. The entry of profit-driven

providers, who may be tempted to make quick returns, in the sector is not an idle

concern, and might perhaps account for the heightened public sector activism in

microfinance development.

The decision by the UEMOA zone countries in 2005 to establish Regional

Solidarity Bank56, for instance, was influenced by concerns that services were not

expanding first enough and by the lack of capacity and orientation for long-term

financing. Governments have also feared the possibility of poor clients being

exploited by unscrupulous microfinance institutions.

In fairness to critics, nonetheless, government involvement in the development of

microfinance can be a big threat if it extends to the direct provision of services, if

risks are poorly managed, and if interest rates on loans are artificially below the

rates charged by efficient market leaders. And yet, in their natural role of policy

and market development, governments have performed well in Africa, even if by

too little and too late.

P

age4

6

Figure 2. Stakeholders role and responsibility

GOVERNMENT GOAL

Provide environment conducive for

Deemphasise direct intervention

DONOR OBJECTIVE

Proper allocation of resources

Support governments policy

CLIENT’S DEMAND

More market oriented

Less dependent on subsidy

MICROFINANCE INTEREST

Expand market share

Adapt and adjust management tools

Viability

Effective

ness

Outreach

Sustainability

P

age4

7

MFI TASK

Apply best practice

Good governance

The improvement of roads and other physical infrastructure, including the

streamlining of laws, reduction of business-licensing barriers, and declared war

on corruption, are all considered critical elements towards the development of

microfinance and other sectors of the economy.

Finally, there is a strong on-going advocacy for treating microfinance as an

integral part of financial sector development. In this regard, several African

countries consider further financial sector reforms an important measure towards

improving the environment for microfinance development. Specifically, many

countries are strengthening the judiciary to ensure timely resolution of

commercial and financial disputes. Secondly, the reforms seek to encourage

financial services providers to accept other forms of collateral in their lending to

expand outreach.

Mali was one of the first countries to formulate a national microfinance policy by

1998. In addition to highlighting the important role of microfinance, the policy

also sought to clarify the roles of various players. The policy gave a vision and

definition of what constitutes microfinance development, its scope, and

presented useful analysis of opportunities and threats. South Africa and Tanzania

followed in 2000. By 2005, following the celebration of the first UN-mandated

Year of Microcredit, most African countries had evolved national microfinance

policies.

For instance, as part of the Year of Microcredit activities, Morocco, for the first

time, considered the best way of evolving a regulatory framework for

microfinance activities and developing an investment fund dedicated to

microfinance and a strategy of intervention for the rural sector.

Togo made a commitment to develop its microfinance sector in 2004 by

elaborating the first-ever national microfinance strategy. The strategy aimed to

create a viable and sustainable microfinance sector to be integrated as a

component of the financial sector. It was institutionally diversified and varied in

Profitability

P

age4

8

terms of products and services. In 2006 and 2007, respectively, Kenya and Nigeria

followed Uganda, Senegal, Burkina Faso, and Benin in formulating appropriate

regulatory frameworks for microfinance activities. Sudan launched its national

microfinance policy in 2007. All the countries in the Central African sub-region

under CEMAC developed national microfinance policies between 2004 and 2006.

These policies indicate that African governments have taken important steps

towards developing the microfinance market in the region. Besides encouraging

investment in and producing valuable sector information for planning, the

national microfinance policy strategies have also clarified the roles for

coordination and development of the sector. Many governments have gone a

step ahead by legislating microfinance and establishing regulatory and

supervisory frameworks, thereby creating ground rules for microfinance

provision. A sense of protection and public confidence is an important

foundation for market development, and these legislation and regulatory

frameworks provide exactly the trust and recognition needed for market

development.

Along with leading the way in market development, many governments have

provided valuable funds for capacity building at all levels of the emergent

industry. In Bangladesh, the PKSF wholesale fund has played an important role in

market development by setting standards and benchmarks and supplying

microfinance institutions with additional capital for expansion and capacity

building. The Egyptian government has initiated the Loan Guarantee Company

(LGC), which has encouraged commercial banks to extend loans to microfinance

institutions and Small and Medium-sized Enterprises (SMEs). In Kenya, the

government has established two funds to enable microfinance institutions to

extend services to vulnerable groups, who were typically not served under their

normal activities. These funds, because they are reasonably priced and

accompanied with some limited grants to enhance capacity and/or meet directly

related administrative costs, is enabling Kenyan microfinance institutions to reach

the hitherto neglected rural and agricultural sector.

Yet, in many African countries, the involvement of governments in the direct

provision of microfinance has been disastrous. Governments have only succeeded

where their participation has been indirect and through third parties operating

strictly according to established good practices. In Kenya, for example, the on-

lending capital provided by the government under the Women and Youth Fund is

P

age4

9

available only to microfinance institutions that have demonstrated capacity to

lend and progress towards their financial self-sustenance. Secondly, the funds are

available to the retail microfinance intermediaries as loans, even if at rates slightly

below the rates at which commercial banks and other financial institutions

typically on-lend to microfinance institutions. The wholesale loans also have

longer grace periods, but are repayable to the government within a specific

period. Furthermore, borrowers of wholesale funds are required by the

government to provide quarterly reports showing disbursements and repayments

of loans made through the funds.

In Eritrea, the only two serious microfinance institutions in the country are both

government agencies. But the two organizations are run and managed

independently as if private enterprise by a hired and well-trained workforce. In

Ethiopia, the government appreciates the role of microfinance in developing its

economy, and even takes bilateral and multilateral loans on behalf of

microfinance institutions for on-lending. But the government is not directly

involved in the provision of microfinance. It treats the money to the retail

microfinance institutions as loans repayable over a specific period, although at

slightly subsidized rates and longer grace period.

Lastly, African microfinance development can learn much from South Africa and

Nigeria. These two countries have mobilized huge amounts of capital for the

development of the sector by engaging the private sector. Through a Financial

Services Charter signed by all financial institutions active in South Africa, the

private sector has developed less expansive financial products, e.g., Msanzi

savings account, through application of information technology to reduce costs,

and has provided funds to institutionalize the country’s Black Economic

Empowerment (BEE) policy. In Nigeria and South Africa, all financial institutions

are required through legislation to reserve at least 10 percent of their pre-tax

profits as contribution towards national microfinance fund. An early experiment

whereby commercial banks were required to diversity at least 10 of their loan

portfolio to microfinance produced disastrous results, hence the current decision

to redirect this private sector support to creating wholesale funds for on-lending

and capacity building. In Nigeria, in addition to the national fund, the public

sector has involved the private sector in establishing a venture capital fund,

specifically targeting the larger SMEs.

P

age5

0

Role of Local Authorities

Local government authorities have an important role to play in microfinance

development in Africa. Unfriendly taxation and business licensing laws can

discourage micro/small-size economic activities. The demand for microfinance

has a strong relationship with the number and growth of such activities at the

local level. A booming local economy can be a source of strength for local

governments.

In Ethiopia, where local governments are concerned about economic growth and

development in their jurisdictions, they have invested in the equity of

microfinance institutions, thereby providing them with the much-needed capital

for growth and expansion. In Tanzania, several municipal councils have invested

in the equity of community development banks to boost their capital base and

strengthen their capacity for growth.

Role of Banks Strategic partnerships between MFIs and banks are becoming common practice

as a sensible solution in extending the provision of microfinance to the poor, and

notable to reduce risks and costs. The challenge, however, is how to successfully

extend beneficial financial solutions and services in a sustainable and responsible

way to rural communities.

So far, there are about 300 commercial banks involved in the provision of

microfinance in one way or another worldwide. Of the US$ 17 billion worth of

loans to MFIs for on-lending, a whole two-thirds come from domestic money and

capital markets, i.e., roughly 3 times volume of publicly intermediated deposits of

US$ 6 billion57. The primary role of commercial banks lies in increased funding,

improved financial structures, and innovation power for new products, e.g.,

insurance and remittances, delivery channels, and systems for microfinance

institutions. Up to 20 large global financial institutions have joined in the

provision of microfinance, thereby increasing the volume of wholesale loans to

MFIs to rise by nearly US$500 million; from US$1.1 billion in 2006 to US$1.4

billion by 200758. About half of the global banks involved in microfinance provide

technical assistance to MFIs—in fact 4 of these provide highly structured and

systematic technical assistance to the microfinance sector. This view has strong

merit indeed, considering that MFIs are the main network for small-vale

payments, but are disconnected from remittance and broader financial service

offerings. At the same time, global insurance and pension funds like Axa France,

P

age5

1

Morley U.K, and TIA A-CREF USA, are even more proactively involved in

spearheading developments in the micro-insurance.

Partnerships in financial services provision will enable MFIs to reach more

unbanked people. The combined efforts of public and private providers should

reinforce or complement each other to bring a pro-poor market place nearer.

While commenting on the role of commercial banks in microfinance, Bert

Koenders59, the Netherlands Minister for Development Cooperation notes:

“… The work of microfinance institutions is quite complementary to the banking business

of financial intermediation. The simplest way to make a systematic change is to develop

relationships with in-country banks, which are fundamental sources of local capital. These

relationships are not limited to finance alone, but can also be developed by transferring

banking expertise to these institutions…”

In direct lending and service provision, still a small fraction of the global banks

involved in microfinance. Under a new arrangement known as MILAA

(Microfinance Institutional Loans for Africa), the Standard Chartered Bank in

partnership with IFC already supports 48 MFIs in 15 countries in Asia and Africa.

So far, the bank has invested US$285 million, and has an outstanding gross loan

portfolio of US$180 million. On its part, the IFC has an outstanding investment of

US$790 in MFIs worldwide. The African Development Bank (AfDB) has invested

nearly US$2 million in bank-type MFIs in Kenya and Uganda.

Global banks are also involved in acquisition. Equity investments in microfinance

by global banks have risen to 22, up by slightly more than 50 percent from 10 in

2006.

Role of Regional Economic Communities It is said that ‘financial institutions follow where trade and commerce leads’.

Improving regional trade and commerce is currently a major strategy that Africa

is pursuing to overcome the problem of narrow markets. Therefore, the

development of cross-border trade in financial services provision must be equally

important if Africa is to realize its dreams. Greater regional integration in the

development of microfinance service provision makes sense in more than one

way.

Integration is achieved through the harmonization of national policies in the

fields of trade, money, and finance, the establishment of a common market, and

P

age5

2

gradual removal of obstacles to the free movement of persons, goods, services

and capital (Article 2 of the African Economic Community, AEC).

Local ownership and participation

To build an African microfinance sector capable of meeting the demand for

varied financial needs of the poor, the industry must comprise largely of

indigenous60, privately owned and funded microfinance institutions. The success

of these institutions will also depend on how actively they are engaged in

developing the value chains or economic activities with a high participation rate

of the poor. In addition, these MFIs will have to be professionally managed as per

the standards and benchmarks collectively determined by practitioners

themselves. In this regard, therefore, there is need to create and develop strong

national, regional and sub-regional practitioner’s associations or networks,

including the development of regional and sub-regional capacities in

microfinance research and human resources development.

Key Principles

To succeed in building the envisioned future microfinance industry for Africa, it

will be important to draw valuable lessons from worldwide experiences in

microfinance development since 1993. Among the notable lessons that Africa can

learn from the past include the following:

1. Microfinance is a widely and highly valued service by

the poor. Therefore, the supply of microfinance

should be market-driven; not supply-led. Even so,

however, there is an important and unavoidable role

for the public sector to play, for example, in creating

the rules and providing incentives and basic industry

infrastructure that would encourage and attract

investment, promote competition, and facilitate

linkages between various market players. The proper

role for governments in developing microfinance is

discussed in a later section of this paper.

2. Financial sector development, including the

development of microfinance in any one country,

should be based on a comprehensive national

strategy, specifically one that has been developed

with the broadest participation of all relevant

P

age5

3

stakeholders. Next, once this strategy is formulated

and endorsed by the stakeholders, it should be

consolidated and given the force of authority by

legislation. Such legislation should, in addition to

defining the government policy on financial sector

development, also present the framework for

regulation and supervision of recognized financial

institutions and markets.

3. Financial sector policy should in the first instance draw

from a nations development aspirations and

particularly emphasize the promotion of new product

development and innovation in financial products,

and also diversity and integration of capital and

money markets from a national as well as regional

perspective.

4. But microfinance regulation and supervision should

support and encourage the continuous evolution and

development of all types of relevant institutions,

methodologies, and financial products suitable to the

poor and financially excluded persons. Appropriate

laws and frameworks for the regulation and

supervision of microfinance can enable MFIs to

mobilize equity from clients, the domestic private

sector, employees of MFIs, and other sources, in

addition to encouraging credible local accountability

structures to emerge.

5. Besides tapping into domestic capital markets, a wider

and more sustainable access to microfinance in Africa

is achievable only when the financial products

provided to the poor people are also embedded in

the local financial systems through which they are

delivered. Hence, microfinance institutions should be able

to mobilize savings from the very populations that they

serve, and their participation in ownership of these

institutions is important. This includes the creation of

P

age5

4

innovative ways to allow the poor invest in the domestic

capital markets.

6. Microfinance institutions (MFIs) that meet appropriate

safety and soundness standards need to be able to

operate under regulatory structures that allow them

to mobilize voluntary savings from borrowers and the

public.

7. The success in financial sector development should be

measured by the overall number of all bankable

households and enterprises that have access at

reasonable cost to the entire range of financial

services for which they are bankable. Thus, the success

in developing a microfinance system should be

measured, not by its size alone, profitability or the

level of efficiency achieved by a few isolated

providers; it should be measured by the number of

next-generation replications that follow the footsteps

of present market leaders.

8. Sustainable microfinance starts with the client at the

center of all strategies. Meeting clients’ needs, which

drives demand in the first place, begins with an

analysis and understanding of client economics. In

the long-term, a microfinance institution can only be

financially self-sustaining if clients themselves are able

to meet their needs.

9. To address the development needs of the rural and

urban poor who succeed in getting access to finance,

it is necessary to also provide them with non-financial

services. Yet there is also a need to separate financial

services from non-financial services, so clients can see

each product in their true context. Thus, it is necessary

for institutions involved in poverty reduction in one

way or another to specialize in the area of their core

competence.

P

age5

5

10. High levels of productivity, efficiency, and excellent

portfolio quality in microfinance depends crucially and

absolutely on the energies, training, motivation, and

commitment of staff, particularly field-level and

frontline staff. Other resources, for example

leadership, management, and operating systems, also

matter. So, all staff should be involved at all times in

strategy formulation and policy development.

11. Neither regulated nor non-regulated financial

intermediaries can on their own meet all of the varied

needs, or provide the wider access to microfinance

currently required by Africa’s financially excluded

population. Therefore, the development of diverse

microfinance institutions and market linkages

between regulated and non-regulated financial

intermediaries is critical to the overall expansion and

deepening of services to the rural and urban poor.

12. The correct pricing of financial products to the poor

people is as important to microfinance institutions as

it is to their customers61: if products are expensive,

this can become a major constraint on demand. And if

the product-pricing is fixed at a level too low in

relation to cost of service delivery, this too can

become a major constraint to supply.

13. Institutional and process innovations typically lead to

greater efficiency and often open up new frontiers in

the delivery of financial services to the poor.

Therefore, microfinance institutions should aim to

discover new frontiers. In this connection, any

subsidies in support of innovation and the discovery

of new frontiers in microfinance should thus be

encouraged and facilitated. Public policy should also

mandate MFIs to set aside some portion of their

profits—at least 5 percent –to fund their institutional

and human capital development needs.

P

age5

6

14. Performance standards, prudential norms and

regulations, and reporting requirements for

microfinance should fit the characteristics of the

sector. In protecting the institutions against potential

loan losses, for example, prudential norms should

preferably emphasize overall portfolio quality and

management strength over risk coverage ratio.

15. Investments to development human resources

capacity for microfinance, in addition to building the

capacity for research and innovation, and the

development of industry networks/professional

associations, is as important in the development of

microfinance in Africa just as is the investments to

create policy environments that are more conducive

to microfinance.

V. Conclusion and Summary

5.1 Creating a conducive environment

Many states have made laws to mainstream microfinance, but these laws are

either foreign or rigid. One of the key weaknesses in first generation microfinance

regulation is the high minimum capital requirements, which several states are

using as a barrier to limit the number of players to ease central banks’

supervisory task.

The recognition of microfinance as a bona fide financial services activity at the

regional, sub-regional, and AU member state level is the first most important step

towards building a strong and dynamic system in Africa. First, this legal

recognition should change how the public and various potential market players

view microfinance. Second, it should give aspiring investors confidence and

encouragement to enter the field of provision of microfinance. Third, it would at

once open up opportunities for aspiring service providers to mobilize local

resources, and the public would in turn get the same confidence and

encouragement to make use of previously distrusted or unavailable services.

Lastly, legal recognition of microfinance as an important part of a country’s

financial system would automatically force the microfinance service providers

P

age5

7

themselves to seek and uphold higher levels of financial integrity and discourage

weak performance that otherwise could endanger the entire system.

It is important to point out here that good legislation is only possible when it

reflects inputs from practitioner networks. So far, this is an area that has been

neglected by most states where legislation for microfinance already exists. The

failure of legislation to drive quality and lift standards and performance in

microfinance institutions has roots in inadequate consultation at the time of

formulating laws to govern their operations. Desired financial integrity of

microfinance institutions can only come about when standards not only exist, but

are also understood and well rooted in the reality of the practitioners. The

standards can make sense only when they are based on benchmarks determined

collectively by the industry and have resonance with the underlying local

conditions. Public policy should, above all, encourage the evolution of strong and

financially self-sustainable local microfinance institutions, that is, organizations

that are capable of delivering demand-driven and affordably priced services and

products.

Drawing from the discussion above, the first strategy towards building strong and

dynamic microfinance in Africa is to make the sector a part of each state’s

financial system through appropriate legislation.

Strategic objective #1: To establish suitable laws conducive to

microfinance development

The assumption behind the first strategic objective for this road map is that good

financial sector laws, if complemented with a more inclusive public policy for the

private sector and empowerment of the low-income populations, would

encourage more investment in microfinance. However, as argued before, these

laws need to recognize that a large portion of the industry’s loan portfolio,

approximately 70 percent, is financed by the same poor clients. Therefore, it is fair

and just that their interest in investing in the development of the sector be

recognized and appropriately and adequately accommodated in the law. In this

connection, AU member states need suitable microfinance licensing and

regulatory laws that directly support the mobilization of local resources for the

mutual benefit of the microfinance institutions and their customers.

The specific areas in which existing microfinance laws and regulations are weak

include:

P

age5

8

1. Unnecessarily high minimum capital requirements,

which create entry barriers. The only exception is

Ethiopia, the first African country to introduce

regulation for microfinance. The laws came into force

in 1996 and set the limit at US$25,000. In many

countries, the minimum capital requirement exceeds

US$400,000. The minimum requirement has in many

cases been adopted without scrutiny either from

conventional banking practices or from Latin America,

where most of the countries have sourced consultants

to lead the regulation process.

2. High minimum capital requirements combined with

restrictions on the proportion and type of assets that

are acceptable as core capital at the point of

transformation denies microfinance customers an

opportunity to invest in the sector. The law often

demands that potential investors must have deep

pockets, good education and work experience. Yet

ownership and management need not necessarily

have the same level of education or professional

background since investors can engage nominees to

represent their interests in governance and leadership

positions in these firms.

3. The prudential guidelines on credit risk management

tend to overlook the alternative collateral mechanisms

synonymous with microfinance, yet these have

enabled microfinance institutions to lend to the low-

income populations at low risk. Both the definition of

unsecured lending and present loan provisioning

requirements ignore group loans secured on the basis

of trust and peer pressure in favor of individual loans

secured by tangible collateral. This severely limits

outreach and negatively impacts on portfolio quality

as the emphasis on security shifts focus from

character assessment to cash flow analysis and the

ability of a client to pay.

P

age5

9

4. Current licensing requirements place stringent

demands on institutions seeking approval while at the

same time assuming that already licensed commercial

banks or non-bank financial institutions are primed

and qualified to deliver microfinance. This is not

necessarily so. Without a good understanding of

microfinance operations or without a trained work

force and suitable systems, there are institutional risks

of banks going into microfinance. Therefore, there is a

need to review existing microfinance regulation to

standardize requirements for entry.

5. The legal frameworks frequently embrace a two- to

four-tier approach, which tends to leave out many

market players. The result is that these players

continue to operate but outside the regulation, either

because they are considered too small to cause

systemic risk, are member-owned and managed, or

because they are non-deposit taking. But this

approach ignores the many potential vertical and

horizontal linkages that could develop between the

different players, both regulated and non-regulated,

as well as resulting risks as the market matures.

Another extreme case of regulation arises where the

law allows only one form of microfinance institution,

as was the case in Ethiopia. Under the circumstances,

there is loss of the diversity which typically develops

in response to specific demands and specialization in

serving different segments of the market.

6. Lack of capacity to supervise numerous institutions

and cost are some of the factors that have influenced

the adoption of the tier-approach. Another

misconception in regulation is the assumption that

systemic risk arises only when microfinance

institutions are deposit taking, member-owned and

managed, or lend to the public in addition to their

internal customers. But experience has shown that the

P

age6

0

failure of one microfinance institution has a negative

impact on all the other market players in the same

area. Although lack of capacity limits the number and

range of institutions that central banks have to

supervise effectively, it is important to design other

measures and institutions that coordinate and

encourage market linkages between various market

players.

7. The present risk concentration ratios ignore situations

where lending is through second-tier intermediaries,

that is, microfinance institutions that lend to other

smaller, locally based financial intermediaries who, in

turn, lend to retail customers. In such situations, the

ratios are too restrictive. On the other hand, when the

concentration ratios are too relaxed, either there is the

danger of some unscrupulous borrowers or the

institutions themselves taking advantage of unsecured

lending permitted under the cover of microfinance to

fuel risk.

8. Existing capital adequacy and liquidity ratios are

largely arbitrary and biased against microfinance

institutions. This is to the extent that microfinance

institutions invest most of their capital in lending.

Provided the loan portfolio quality remains excellent,

it is important that such ratios not be determined

arbitrarily on BASEL or conventional banking

guidelines. In countries like Ghana and Nigeria, rural

banks are required to hold as much as 75 percent of

their assets in short-term instruments such as treasury

bills. This denies them an opportunity to expand

intermediation.

9. The licensing and supervision of microfinance

institutions in Africa directly undertaken by the central

banks. Unfortunately, conventional bank

regulators/bankers still have a poor understanding of

P

age6

1

microfinance operations and institutions.

Consequently, they tend to deal with these institutions

in a heavy-handed manner, making regulation

expensive and inefficient. In many countries, the

capacity to supervise conventional banking is often

overstretched or inadequate. This leads regulators to

limit their time and focus on microfinance. Therefore,

it is important for regulators to consider the option of

delegating regulation and supervision, depending on

the size and volume of business handled by different

market players. In many countries outside Africa, self-

regulation under delegated authority has worked well.

5.2 Improving Coordination and Cooperation

Along with creating policy environments that are conducive to the development

and evolution of microfinance in Africa, there is also a need to encourage and

support the development of strong industry practitioner national associations.

Strategic objective #2: To strengthen and improve industry

infrastructure

Poor coordination and the general lack of strong, professionally managed

microfinance institutions, which is a widespread problem in Africa, is largely due

to the absence of policy or legislation that holds practitioners to some standards.

Until two years ago, there was no country with a policy compelling microfinance

practitioners to belong to a professional membership association for the purpose

of coordinating industry and upholding standards. However, this is beginning to

change. In the seven CEMAC zone Central Africa states and eight UEMOA zone

West African states, it has become a requirement that once licensed, all

microfinance institutions must become members of the national professional

membership association.

Another cause of poor coordination and weak microfinance institutions has been

the lack of policy and lead agencies in guiding and monitoring the development

of microfinance. Where policy and lead agencies exist but coordination and the

industry are still weak, the problem is often due to lack of adequate resources,

P

age6

2

either in terms of personnel, finance, or systems. The fact that in some countries,

government agencies see microfinance only from the perspective of their specific

mandate, that is, agriculture, rural development, or poverty alleviation, has

caused fragmentation or duplication in coordination and undermined

effectiveness. Fortunately, in most countries microfinance government agencies

are increasingly seeing microfinance within a wider context from a financial

system development perspective.

In addition to encouraging the entry of various service providers into the

development of microfinance, better coordination of the industry through

improved capacity of relevant government agencies and greater cooperation

among practitioners will help entrench standards and professionalism. Because of

greater cooperation and the resulting order, the industry will gain more visibility

and attract more talented workers. Microfinance in Africa can hope to improve

performance only if it can attract suitably qualified and talented staff.

Through better coordination and cooperation, both the public sector and

microfinance practitioners can pool resources to undertake capital-intensive

projects like developing relevant management information systems, designing

suitable curriculum of common interest, and joint training of management and

leadership.

Sharing of information, experiences, conducting industry research, and setting

high standards of practice are possible only where there is good coordination

and cooperation among the players. Self-regulation, where a regulator has

limited capacity, is only possible where practitioners uphold standards and

benchmarks that they understand well and have been involved in setting.

5.3 Introducing industry standards and Ratings

Although lack of capacity and undercapitalization are among the primary factors

behind the current poor outreach and financial performance of microfinance

institutions in Africa, it is also true that few countries in the region have

established standards and benchmarks to guide institutions. Unfortunately, this is

also true for countries that have established regulation and supervisory

frameworks for microfinance. Even under the UEMOA zone, where microfinance

has been under regulation for at least a decade, there are no performance

benchmarks for the licensed providers. The CEMAC zone has developed 21

prudential guidelines, but they only cover credit risk management, loan

provisioning and write-offs, liquidity ratios, minimum capital requirements,

P

age6

3

ownership, capital adequacy ratios, and cash management. Africa is yet to

develop rating standards that are context-based and that managers can apply

systematically to guide their institutions towards improved performance. During

the past two decades, benchmarks and best practices have facilitated significant

performance gains in both the commercial and the public sectors.

In the absence of operational rating standards and performance benchmarks,

overall performance depends solely on the initiative of individual managers and

leaders, orientation, or internal incentives. Rating is now a service that is available

globally, but it is costly given that no rating agencies operate from within Africa.

So far, only 35 microfinance institutions have been supported and facilitated to

conduct a rating exercise by INAFI Africa with support from OxfamNovib. INAFI

has worked with MicroRate, a leading American rating agency, to develop

benchmarks and standards of performance for African MFIs. However, progress is

slow.

Strategic objective #3: To improve performance and quality of

services, and increase profitability

These difficulties notwithstanding, it is critical for Africa to develop domesticated

rating standards that can help members plan, monitor, and manage their

operations. The AU sees the development of these standards as paramount if

microfinance institutions are to improve their outreach and financial

performance. This is a very important strategy towards, not only increasing

outreach, but also attracting more investment and improving the impact of

microfinance on low-income populations.

Ultimately, the continent’s success in expanding access to microfinance and

achieving other strategic goals hinges on strategies focused on improving the

integrity and performance of microfinance institutions. However, the

microfinance institutions themselves bear the bigger responsibility of earning

public trust by offering quality and reasonably priced services/products by

running efficient and profitable operations and being transparent to public

scrutiny.

The AU recommends that member states work with players engaged in

microfinance within their borders to evolve a legally binding collective promises

or charters through which the firms should conduct their business.

P

age6

4

Member states should set certain standards for leadership and management of

microfinance providers and upholding transparency and confidence not to

undermine public trust.

In view of the foregoing discussion, introducing policies that makes membership

in a professional industry association mandatory for practitioners is the first

critical step towards establishing standards and creating order in the rapidly

expanding sector. Through the national associations, members can articulate

their needs and more effectively engage their governments in formulating

suitable policies and strategies to help grow and develop the sector. In addition,

peer pressure could be the catalyst required to get more market players to

observe the desired standard, hence improving professionalism. The AU regards

the support and development of national professional associations as being vital

to the developing the industry.

Considering that most microfinance institutions are not yet self-sustaining, there

is justification for selective and limited public sector support in building the

national networks until they are strong enough to serve the purpose.

5.4 Increasing the supply of capital

While a more conducive policy environment will help catalyze the mobilization

and investment of new capital towards growing the sector, there are many

obstacles that must be overcome first before Africa can achieve the five goals of

developing the sector. The lack of adequate capital to meet immediate

microfinance customers’ needs is so serious that Africa should consider

establishing a regional microfinance investment fund. On the one hand, the

tremendous pressure on MFIs to meet customer needs means that most

institutions have invested all their capital in loan portfolios, thereby sparing

almost nothing to upgrade capacity or streamline management systems.

Consequently, there is a massive demand for capital for investing in capacity

building of microfinance. Therefore, there is a need for a regional capacity-

building fund to help the institutions to improve their financial performance and

expand outreach.

Considering the flow of remittances to the region and the expertise available with

the African Diaspora a broad, it will be important to create linkages and

partnerships in the area of having MFIs involved in remittances.

P

age6

5

Strategic objective #4: To Increase investment capital for

microfinance

In this regard, mobilization of investment capital is a priority strategy that will not

only facilitate the desired improvements in institutional and human capacity, but

also enable the microfinance institutions to improve both outreach and financial

performance.

5.5 Lowering cost and Improving Efficiency

Because microfinance is an emerging industry market, continuous research and

innovations will remain important to unfold the many unexplored promises. This

is an area that is amenable to large economies and where the AU would like to

provide greater leadership. Since, like the current global economy, it is

knowledge-based, improved access to knowledge and information can leverage

innovation and the development of new products.

Strategic objective #5: To improve the efficiency and impact of

microfinance

Together with the other regional economic blocks, the AU sees huge benefits in

encouraging cooperation in research and innovation regionally to improve the

efficiency and performance of the microfinance sector.

5.6 Building and Enhancing Capacity

The overall success in developing the microfinance sector in Africa depends on

the quality of its people and institutions. In this regard, Africa needs to invest

significantly in developing management systems and personnel if it is to achieve

the five goals of microfinance development.

Strategic Objective #6: to Increase investment in institutional and

human capital stock

Regular investment in institutional and human capacity building is absolutely

necessary. To ensure that microfinance institutions provide for their capacity

development, it is proposed that governments make mandatory reserves, of at

least 5 percent, part of the licensing and regulatory requirement for practitioners.

The threat of poorly managed and institutional weak microfinance institutions to

the overall development of industry cannot be overemphasized. Due to lack of

capacity, many microfinance institutions risk failing: in Niger, about three MFIs

are under statutory management. In both Kenya and Uganda, where microfinance

regulation has been selective or elitist, the pubic have lost hard earned savings

through unsupervised, undercapitalized, and poorly-run microfinance institutions.

P

age6

6

The fact that Uganda, which already provides for microfinance regulation and

supervision, has lost five of the unsupervised microfinance institutions in the last

twelve months alone is enough indication that governments should demand for

adequate institutional and human institutional development among the

institutions of microfinance. Perhaps an additional strategy to ensure that

microfinance institutions have adequate capacity to deliver services is to require a

minimum basic professional qualification and training for certain cadres of

microfinance staff that must be on board for an institution to be allowed to

engage in microfinance. Through delegated authority, the governments and

central banks could engage apex bodies or national microfinance networks to

monitor and ensure that all organizations in providing microfinance have the

necessary internal capacity as proposed.

In many instances, lack of adequate institutional and human capacity among

African microfinance institutions is due to the lack of capital, as mentioned in the

introduction. In this regard and considering that many MFIs are either young or

financially still not self-sustaining, governments around in the region, together

with the AU should establish various capacity building funds for the sector.

Access to such funds, however, should be for a limited period and be pegged on

very clear performance targets. Through regional, sub-regional, and national level

cooperation and participation, the quality of technical assistance and training

provided to the sector with such funds could be improved by working together

to develop common standards. Through cooperation and exchange of

experience, the microfinance institutions through their national level networks

can develop expertise

5.7 Integration and Regional Cooperation

This road map was intended to set out a regional framework through which the

AU can coordinate efforts to improve the capacity and performance of

microfinance institutions at the national and sub-regional levels. It also aimed to

increase the channels of acquiring capital to finance the growth and expansion of

services. The document is motivated by the realization that, despite high demand

for microfinance throughout the region, the vast majority of Africa’s poor and

low-income population is still financially excluded and that recent advances in

expanding and deepening outreach seem not to have had the desired effect. To

this end, improving the legal and institutional environment in which micro-credit

providers operate is an important step.

P

age6

7

Strategic objective #7: to harmonize regional microfinance policy

and promote cooperation and trade in

microfinance

To achieve this objective, the AU needs to go a step farther by urging its

members to adapt institutional, legal and commercial frameworks needed to

promote a favorable environment for the development of microfinance and

micro/small-scale enterprise. This should include the involvement of practitioners

in policy dialogue and self-regulation to ease the pressure on central banks to

regulate the institutions directly. For this to work, however, the AU needs to

spearhead the development of operational standards and performance

benchmarks. In this regard, member states should be encouraged to support the

development of national microfinance practitioner networks by requiring all

licensed institutions to belong to relevant apex associations.

It is in public interest to strengthen these associations by providing initial basic

funding to ensure that the networks have qualified and competent personnel to

be able to convene regular industry forums to discuss and review matters of

interest to members. The funding should be only for a limited period to

encourage the institutions to embrace financially sustainable operations that

would enable them to perform their role of nationwide monitoring and reporting

of intermediary institutions.

While member states should be encouraged to allow tax exemptions for

microfinance institutions in the initial period of their licensing and regulation,

perhaps three to six years, they should be required to provide for their future and

the industry’s capacity building through mandatory reserves. A rate of 5 percent

of net profits is recommended to be incorporated in the prudential guidelines.

5.8 Establishment of a Regional Capacity Building Facility

In addition to short-term and selective tax exemptions and limited funding of

industry infrastructure at the national level in the initial stages of microfinance

market development, it is recommended that a new Africa-level research,

innovations, and capacity development facility, equipped with adequate staff and

resources, be established to provide expertise and support for the development

of micro-finance institutions in member states.

P

age6

8

Strategic objective #8: to enhance leadership and management

capacity to improve professionalism in the sector

The new facility would, among other things, conduct market analysis, establish

guidelines, promote training courses, and develop the mentoring capacity

essential for building strong leadership, management, and governance

manpower for the continent’s microfinance institutions. Financial support for the

facility should come from a special fund set up to develop and finance the sector.

The fund should be financed from annual contributions by member states.

Through annual regional microfinance forums, which should be instituted as early

as possible, preferably from 2009, the facility can identify new industry

developments and work with practitioners to identify new opportunities and

propose continuous improvement in knowledge and capacity. The annual surveys

and analysis of performance the microfinance development facility should carry

out could provide an important platform for raising investment capital for the

sector.

5.9 Establishment of Regional Wholesale Fund(s)/Venture Capital

To find more capital for microfinance institutions, this road map proposes the

setting up of wholesale microfinance funds at the regional level. Africa should

also explore the setup of regional loan guarantee funds or instruments for MFIs.

Alternatively, a window could be established at the existing regional and sub-

regional banks, for example, the AfDB, the Eastern Africa Development Bank, and

the Regional Solidarity Bank, which can address the present capital shortage and

investors bias against the African microfinance market.

The African Investment Bank in particular should establish a microfinance

refinancing window to ease the current capital shortage which constraints MFIs

from expanding outreach and enhancing their capacity and systems to scale up

outreach. Where possible, the Bank and other regional wholesale funds setup for

the purpose of easing MFIs’ current capital shortage in the region should work on

creating and developing links with various African Diaspora organizations and/or

associations, with a view to tapping into remittances to support microfinance

activities. Linkages with the African Diaspora that lead to technology and skills

transfer would be particularly valuable to the building of local capacity for MFIs.

P

age6

9

Strategic objective #9: to increase the supply and lower cost of

capital for microfinance development

In setting up this fund, Africa can lower the currently cost of investment and

perhaps minimize the temptations of member states getting involved directly in

the provision of microfinance. If adequately funded and properly managed, the

African member states can avoid getting directly involved in financing

microfinance operations and can benefit from the professionalism of

microfinance managers. Secondly, by linking access to capital from this fund to

established regional standards of performance and benchmarks, this fund can

itself become a powerful instrument for promoting and encouraging increased

professionalism in the sector.

5.10 Establishment of a Regional/Sub-Regional Rating Fund

Until recently, it was possible for interested microfinance institutions to obtain

partial funding for rating services. However, these donor-initiated funds have

served their purpose well and will soon be closed. Yet considering the importance

or rating in stimulating healthy competition and the search for operational

excellence, as well as greater efficiency and innovation, there is need to establish

a regional rating fund—in addition to legislating for mandatory rating once every

18 months for microfinance institutions that have reached a certain age or

threshold. Rating could also be incorporated among the requirements for

microfinance institutions accessing the aforementioned regional funds.

Strategic objective #10: to improve professionalism and

dynamism of the microfinance sector

Rating services are not only helpful in driving up standards, but also in signaling

and prompting early response whenever any adverse industry developments are

detected. And even more importantly, the establishment of the rating as part of

responsible microfinance development could play an important role in enforcing

standards and reducing industry monitoring costs. In this regard, member states

of the African union should encourage and support the establishment of local

rating agencies to reduce costs and ensure a reliable availability of services. In the

long-term, as national and regional microfinance institutions mature, they

themselves should be encouraged to jointly establish independent regional

rating firms, which can be a good thing for the industry. Such firms will be more

familiar with the local situation and could work closely with the industry to

P

age7

0

promote learning and improve standards and level of professionalism in the

sector.

References & End Notes

1 Sodokin, Koffi, (2007). “Functional and Structural Complementarities of Banks and Microbanks in

Less Developed Countries (LDCs)”, Department of Economics and Management, Dijon, Cadex:

Burgundy University, France. April.

2 United Nations, (2007). “The International Year of Micro Credit: Comoros Country Profile”, New

York: The United Nations International Year of Microcredit.

3 Bessaha, Abdelrahmi, Francis, Bokilo, Karangwa, Joseph, Yinqui Lu, Mongardini, Joannes, Yaya,

Moussa, Carcillo, Stephane, Jean-Pierre, Nguenang, and Oliva, Maria, (2007). “Republic of Congo:

Selected Issues Paper, IMF Country Report No. 071”, Washington: International Monetary Fund.

4

5 See Aportela, Fernando, (1999), “Effects of Financial Access on Savings by Low-income People”,

Research Department, Banco de Mexico. December.

6 Sebstad, Jennifer and Gregory Chen, 1996, Overview of studies on the Impact of Microenterprise

Credit, Washington D.C.: USAID.

7 OECD, 2005, The Financial Sector’s Contribution to pro-Poor Growth, DAC Network on Poverty

Reduction, Hot Topic paper prepared by the Task Team on Private Sector Development

8 International Labour Organization, (2002). “Microfinance for Employment Creation and Enterprise

Development, sixth item on the Agenda of the 283rd Session of Committee on Employment and

Social Policy, Geneva: the International Labour Organizations.

9 Sebstad, Jennifer, and Gregory, Chen, (1996). Overview of Studies on the Impact of

Microenterprise Credit, Washington, D.C.: USAID.

10 Pitt, Mark and Shahidur, Khandkar, (1998). “The Impact of Group-based Credit Programs on Poor

Households in Bangladesh: Does the Gender of Participants Matter?” Journal of Political Economy,

Vol.106, No. 5, pp. 958-996.

11Murdoch, Jonathan, (1998). “Does Microfinance Really Help the Poor? New Evidence from

Flagship Programs in Bangladesh”, California: Hoover Institution, Stanford University.

12 Prehalad, C.K., 2005. The Future at the Bottom of the Pyramid (BOP): Eradicating Poverty

Through Profits, New Jersey: Wharton School Publication.

13 See Don, Johnston and Jonathan, Murdoch, (2007). op. cit

14 See Don, Johnston and Jonathan, Murdoch, (2007). op. cit

15See Lapenu and Zeller, (2001), op. cit.

16 Patrick Honohan and Beck Thorsten, 2007, Making Finance Work for Africa,

Washington D.C.: The World Bank Beck.

17 Honohan, Patrick, (2004). ―Data on Microfinance and Access: Thinking About What is

Available and What is Needed‖, Mimeo, Washington, D.C.: The World Bank.

18 See Patrick Honohan and Thorsten Beck, 2007, ibid.

19 CGAP, (2004). ―Regional Funder Survey—Sub-Saharan Africa‖, Washington, D.C: CGAP.

P

age7

1

20 See Roodman, David and Uzma Qureshi, (2006). "Microfinance as a Business‖, Center

for Global Development, Working Paper Number 101, November.

21 See Roodman, David and Uzma Qureshi, (2006). "Microfinance as a Business‖, Center for

Global Development, Working Paper Number 101, November.

22 Bond, Philip, and Ashok, Rai, (2002). ―Collateral Substitutes in Microfinance‖, Paper

prepared for the North American Meetings of the Econometric Society, the NEUDC and

Irvine Development Conference, jointly published by Northwestern University and Yale

University.

23 Rhyne, Elisabeth, and Maria Otero, (2006). ―Microfinance through the Next Decade:

Visioning the Who, What, Where, When, and How‖, A Paper Commissioned by the Global

Microcredit Summit 2006 held in Halifax Canada, Boston, ACCION International.

24 Valentina Hartarska a and Denis Nadolnyak b, (2007). Do regulated microfinance institutions achieve better

sustainability and outreach? Cross-country evidence, Auburn, Arlington: University of Georgia, Department of

Agricultural and Applied Economics.

25 Hishigsuren, Gaamaa, (2006). ―The Transformation of NGOs into Regulated Financial

Intermediaries‖, Paper presented at the third Microcredit Summit Campaign Conference

held in Halifax, Canada.

26 Oketch and Mirero, ibid, citing from Liza, Valenzuela (2001), Robin Young et al (2005),

mention that average number of clients reached by a sample of 70 regulated microfinance

institutions was 7,250—the large and small commercial banks were reaching between

32,525 and 35,912 clients. Moreover, among the big state-owned banks in the sample, e.g.,

National bank of Microfinance in Tanzania, just two served more than 19,00o in a study of

250 rural financial institutions involved in microfinance. In Latin America where the

market is developed, 68% of the market is dominated by small MFIs, which individually

reach less than 20,000 customers: almost half of the market (48%) is served by MFIs

within 10,000 customers range.

27 DfID and AMFIU, (2007). Third Africa MFI (Micro-Finance Institutions) Conference:

―New options for rural and urban Africa‖, Held in Kampala, Uganda, August 20-23.

28 According to reports presented at the 3 rd African Microfinance in Kampala, Uganda in

July 2007, each of the four Ugandan MFIs that had transformed used between S1.8 to $2.o

million in preparing to transform, which was approximately eight times the minimum start-

up capital for deposit-taking MFIs.

29 See n. d Princes, Peasants and Pre-tenders: The Past and Future of African Microfinance,

Kampala.

30 Lapenu and Zeller, (2001). op. cit.

31 Otero, Maria, and Elizabeth, Rhyne, eds., (2001). Mainstreaming Microfinance: How Lending to the Poor

Began, Grew and Came of Age, West Hartford, CN: Kumerian Press. Pp. 105, available online at

findarticles.com/p/articles/mi_qa3800/is_200604/ai_n17171947/

32One of the databases is maintained by INAFI Africa and the other by MicroBanking

Bulletin, a global industry system established in 1995 by CGAP.

33 Ann-Lucie, Lafourcade, Isern, Jennifer, and Patricia Mwangi, and Brown, Mathew,

(2005). ―Overview of the Outreach and Financial Performance of Microfinance Institutions

in Africa‖ in eds., MicroBanking Bulletin, Spring Vol.3.

34 See Microcredit Summit Campaign report, (2007). op. cit.

35 Daley-Harris, op. cit

P

age7

2

36 International Monetary Fund, (2008). “Niger IMF Country Report No.07/14”, Washington, D.C.:

International Monetary Fund.

37 Owen, Graham, (2007). Rural Outreach and Financial Cooperatives: SACCOS in Kenya, Agriculture

and Rural Development Report, Washington, D.C.: The World Bank

38 Development Alternatives International, INC, (2004). “Microfinance Sector in Mali”, USAID,

August, available online at www.usaid.org.ml/mes_photos/microfinance_in_mali.doc

39 Saab, Samer, and Jerome, Vacher, (2007). “Banking Sector Integration and Competition in

CEMAC”, Washington, D.C.: International Monetary Fund at online mpra.ub.uni-

muenchen.de/2011/MPRA paper No. 2011.

40Sacerdoti, Emilio, (2006). “Access to Bank Credit in Sub-Saharan Africa: Key Issues and Reform

Strategies”, IMF Working Paper 05/166, Washington, D.C.: International Monetary Fund.

41Nagarajan, Geetha, (2001). “Disaster Management Microfinance Institutions in Mozambique:

Reflecting on Lessons Learnt for Future Directions”, CARE Mozambique and MBP/USAID.

42 Oketch, H. Oloo, and Mirero, Stephen, M., (2004). “INAFI Africa Electronic Survey of Microfinance

Institutions in Africa”, unpublished. Nairobi: INAFI Africa.

43 Don, Johnston, and Jonathan, Murdoch, (2007). op. cit.

44 Ledgerwood, Joanna, and Victoria, White, (2006). Transforming Microfinance Institutions: Providing full Financial

Services for the Poor. Available www.microfinancegateway.org/content/article/detail/35229.

45 Oketch and Mirero, (2005). op. cit.

46 See Management series of the Microfinance Center for Eastern and Central Europe and

Newly Independent States, based in Warsaw, Poland.

47 Steinfield, Laurel, (2008). ―Building Bridges to the Unbanked: Innovations Abound in

the Financial Sector‖, African Institute of Corporate Citizenship (AICC), South Africa.

48 Camilleri, Jean-Luc, (2005). ―Micro and Small-Scale Enterprises and Microfinance in

Africa: The Support to Dynamic Enterprises-an effective weapon for poverty alleviation‖, in

ILes Notes, 2nd edition, August 2006. Working Program Europe in the World Development

Section paper No.4, Thomas More Institute. Available online at www.institut-thomas-

more.org.

49 The recent experience of microfinance sector in Benin is very instructive. Due to

increased competition for clients and the direct involvement of the Government in the

provision of microfinance (through its $12.3 million Microcredit aux Plus Pauvres, i.e.

MCPP project), several problems have saddled the sector in 2005 and 2006. Dishonest

practices by some big lenders, lack of effective credit reference system, and over borrowing

by customers are just some of the challenges experienced. Due to lack of adequate

institutional and human capacity, two of the networks have faced liquidity shortages. As a

result there has been decline in portfolio quality. Several MFIs are struggling to meet

regulatory requirements. For details, see Consortium ALAFIA-Benin, n. d. ―Microcredit for

the Poorest and Market Distortions in Benin‖, Cotonou: ALAFIA-Benin.

50 Peter Bate, 2007. ―Government Intervention in Microfinance: Threat or Opportunity?‖,

Microenterprise Americas Magazine (Fall 2007), available at website

http://www.iadb.org/NEWS/articledetail.cfm?artid=4134&language=En.

51 Direct government intervention in microfinance has been criticized in Latin America,

where it has become common, and Africa, precisely because of driving interest rates on

loans down.

52 See Ernesto Aguirre, a consultant at the World Bank, available at website

http://www.worldbank.org/

53 CGAP, (2006). ―Scenarios for future Microfinance Development to 2015‖, available

online at www.cgap.org/portal/site/cgap/

P

age7

3

54 See the Economist Intelligence Unit, 2007. Microscope of Microfinance in Latin America

and the Caribbean, Washington D.C.: Inter-American Development Bank.

55 Return to capital from investments in microfinance in Africa is reportedly at a handsome

20 percent per year.

56 International Monetary Fund, (2007). ―Cameroon –Selected Issues: IMF Country

Report No. 07/287, Washington, D.C.: International Monetary Fund.

57 Brad, Swanson, (2007). ―Microfinance Securities XXCB: Developing Worlds Markets

2006‖.

58 ING Bank, (2008). A Billion to Gain: The Next Phase, The Hague: ING Bank.

59 Netherlands Platform for Microfinance, (2004). ―Microfinance Current Trends and

Challenges‖, October. Available online at www.microfiannce.nl

60 Long-term commitment is necessary and essentially, hence local ownership vis-a-vis

foreign ownership.

61 Until high client dropouts signaled that microfinance clients also care about price as they

do about access, there was pressure on microfinance institutions to increase interest rates

on their loans to eliminate reliance on subsidies. In hindsight, however, this strategy makes

sense only if the poor are rate insensitive: then microlenders increase profitability (or

achieve sustainability) without reducing the Poor’s access to credit. In any case, the fact that

loan size is far more responsive to changes in loan maturity than to changes in interest

rates, also suggests that present policy concerns about short-term orientation of Africa

microfinance institutions is justified. See, for example, Karlan, S. Dean and Jonathan

Zinman, 2007. ―Expanding Credit Access: Using Randomized Supply Decisions to Estimate

the Impacts, Center for Economic Policy Analysis, Discussion Paper No. 6180, available at

Website: www.cepr.org/pubs/dps/DP6180.asp.asp