African Microfinance PolicyConvergenceThis policy paper demonstrates thecapabilities of Microfinance as apotential source of balanced economicgrowth for Africa, as well as a source ofinvestment opportunity that couldlead to poverty reduction. These slidesare designed to show exactly howmicrofinance is rapidly changing andoffering hope for uplifting millions ofAfrica’s vulnerable and low-incomepopulation from poverty, especiallythe principles, strategies, and actionthat if taken could make it possible tochange lives.
Importance of Microfinance Less than 4% of African population have access to finance Only through Microfinance is it possible for the poor and low income households to save, invest and cope with various shocks. Until recently it was not possible for the poor and low income households to safeguard their families against death, disability, or other risks e.g. theft, fire but this is now possible through microinsurance
Cont.../1 Low and irregular incomes has for years prevented the poor and low income families from accumulating useful assets, thereby perpetuating vulnerability. However, thanks to Microfinance, it is now possible for this group to accumulate valuable assets e.g. through micro leasing, Inventory credit makes it possible for farmers to get optimum value for their output by reducing their vulnerability
Cont…/2 Microfinance enables poor and low income farmers to take advantage of their grit and ingenuity to increase their output to a higher level of production for example, by adopting new seed varieties and modern techniques Through microfinance the poor and low income population can be able to provide the best education for their children on the basis of their future income
Cont…/3 Microfinance is going to help Africa expand its private sector by boosting the level of confidence and productivity of the micro and small scale entrepreneurs, and by providing the capital needed for growth e.g. through SME loans Where access to Microfinance is wide scale and well sustained, e.g. in Bangladesh, there is evidence that it can lift many families out of poverty, and even readdress entrenched gender biases
Does Africa have a well establishedMicrofinance systemModern Microfinance is well rooted inthe region, but it is at different stagesof development in different countriese.g. in some countries it is justgerminating (Sierra Leone, Liberia,DRC, etc), while in others it is justabout to blossom (Senegal, Nigeria,Cameroon, etc).In others (South Africa, Botswana,Eritrea, Zambia) it is difficult to tellwhat is going on, yet in others (Benin,Uganda etc) there seems to be somereversals despite recent positivedevelopments.
Stage and Level of Developmentacross the Region Countries where the system is at advanced stages of development (as judged by): Institutional diversity Scale of outreach No. of providers that are institutionally and financially self sustainable Product base Closeness or distance to international bets practices and benchmarks Affordability of services Competitiveness
Cont…/1 Countries where the system is at advanced stages of development (as judged by): Degree of integration of microfinance into the overall financial system of the country Integration of microfinance in overall national macroeconomic policy framework Level of cooperation and coordination among providers and the government Quantity and quality of resources dedicated to Microfinance development Talent and human resource base Speed and direction of growth
Does the system advance theinterests of the countryIn countries where the systemis well advanced, it directlyfacilitates the achievement ofa nation’s and peoples’aspirations
Country groupings…5 Scenarios Different levels of development Advanced Stage Intermediate Stage Take-off Stage Nascent Stage Limbo
What is the scale of Africa’sMicrofinance System4 Scenarios
Sub No. of Current Mean No. of No. of Pop. W/h Pop. W/h Loan Active Loan Region Countries Pop. Poverty Retail MFIs Bank MFIs Clients Portfolio (Millions) Rate Banks Account (mean %) (000’s) (USD, (mean %) Millions)Northern 6 161.8 20.4 120 357 25.0 4.9 3113.8 539.3 Arica West 15 275.8 61.5 172 3946 12.4 3.8 9270.5 1,132.1 Africa Central 9 110.8 522.3 46 1164 76.3 13.6 1043.3 348.2 Africa East 13 278.0 46.2 145 1932 7.4 3.2 8947.4 2,013.7 AfricaSouthern 10 130.28 56.4 122 3249 16.8 3.3 6650.3 5,863.8 AfricaSum/Avg. 53 955.3 56.8 587 10,648 12.7 3.4 27225 9,897
Industry’s SWOT AnalysisSTRENGTHS WEAKNESSESSo far, 23 countries have created a conducive enabling Most MFIs are not liquid enough to meet demandenvironment for microfinance and another 31 have enacted High operational costsregulation for microfinance Huge losses; few MFIs are financially self-sustainingThere is high demand for savings facilities and micro credit High client dropoutsMicrofinance is a virgin market: just about 4 percent of the Low penetration rates in most of the countries, especiallymarket has been captured limited outreach to rural areas. In 2005, for instance, theMFIs have found the secret to deliver a wide range of Nigerian microfinance sector held just 0.9 percent of totalfinancial services to the poor and low-income groups on credit to the private sector and 0.2 percent of the GDP.sustainable terms. Inadequate staffing/ trainingRapid accumulation of best practice knowledge, which is Interest rate ceiling in several countries hinder outreachreadily available through the internet Low capital base Absence of support institutions Up to 24 percent of the MFIs are dependent on donor support Lack of adequate capacity to supervise and regulate MFIs’ operations High concentration of the market and not enough competition that could encourage efficiency and innovation Low population density in most parts of Africa Poor roads and lack of adequate infrastructure
Cont…/OPPORTUNITIES THREATSMicrofinance is taking shape as an asset class for investors, Client dropouts is too highso raising capital in future would be easier Many MFIs lack strong management and leadershipImproved macro-economic environment, e.g., steady andmoderate growth averaging 5 percent in the last 5 years, Minimum capital requirements are too highstable and single digit inflation, and greater awareness and There is likely to emerge competition from banks as thebetter appreciation of the role of microfinance among African sector proves to be profitablegovernments Consumer backlash due to high interest ratesThe market is hardly satisfied Rapid growth without commensurate investment in peopleThere is increasing linkages between mainstream financial and management system can result into declining portfolioinstitutions and MFIs quality and high loan lossesNew information technology that can help drive down costsand enable greater outreachThere is room for new institutions that can focus on differentmarket niches that are hardly touched yet, i.e., focus on thepoorest of the poor, agriculture, and slightly bigger small-scale enterprises, which are currently not being served byMFIsThere are huge opportunities to introduce or offer newproducts and servicesThere is plenty of investment opportunities for private sectorThere is space for new institutions with quick appraisal anddisbursement to prosper
Strategies and action plan1) How to expand outreach to low-income populations with basic savings, payments, insurance, and credit services through improved efficiency, more innovative use of existing networks, the establishment of more service providers, and development of a more inclusive financial system.2) Building a well-coordinated and diversified microfinance sector in which strong and healthy financial institutions can thrive. (Institutions are systems that have an explicit goal of generating meaning in the society in which they exist. In the case of microfinance in the 53 African states, this consists in enabling the low-income populations to also have access to suitable and affordable financial services, in the first instance. Secondly, they should enable the economy of member states to mobilize vast but untapped savings and transform these into investment and production).
Cont…/13) Improving the performance of microfinance institutions and enhancing their capacity to deliver appropriate financial services to low-income populations through increased capacity building, promotion of good practices, development of better management systems, increased training of the work force and management, and the development of infrastructure.4) How to improve the quality of microfinance services and impact and, particularly, enhance the empowerment of marginalized groups through increased competition, consumer education and awareness, and improved transparency.5) Creating a dynamic and stable macroeconomic environment for micro- and small-scale enterprises to flourish and become more competitive regionally and globally through the provision of microfinance, thereby supporting more investment and trade.
Cont…/26) Enacting suitable laws, regulation, and operational standards as well as systems of accountability, audit, reporting, and supervision to encourage and facilitate the emergence and growth of a strong, dynamic, and profitable microfinance sector by engendering greater transparency and confidence in the system.7) How to increase public awareness and knowledge of the microfinance industry, thereby creating interest and attracting more investors by conducting continuous research of the sector, innovation, and dissemination of information.8) How to establish strong, well managed, and respected industry support organizations, for example, practitioner member networks capable of enforcing discipline among members and leading in the development of basic industry standards and benchmarks, rating agencies, credit registries, and specialized audit services.
Cont…/39) How to increase the availability of and lower the cost of investment capital for microfinance development through improvements to the domestic capital markets, establishment of wholesale funds, guarantee schemes, and the publication and diffusion of valuable sector information.10) Encourage and increase more linkages between banks and various categories of microfinance institutions that serve different segments of the market through suitable public policy, incentives, and regulations.11) Promotion of effective and healthy public sector participation in the development of microfinance through investment in the building of strong industry infrastructure and development of customized national and regional microfinance policies and strategies.
Cont…/412) How to encourage increased national and, especially, regional cooperation among AU member states in furthering the development of microfinance in Africa in addition to encouraging and supporting regional trade and investment.13) Promoting and introducing consumer education and protection through increased public and/or consumer awareness about financial products and the enforcement of suitable consumer rights, microfinance charters, and obligations.14) Reducing the long-term cost of financial services to low- income populations, especially small enterprises, through improved competition and access to capital, enforcement of suitable service charters, better market regulation and supervision, and increased consumer education.