Affordable Access to Financial Services for low-income African entrepreneurs – Opportunities and Challenges Gerhard Coetzee Director: Centre for Microfinance, University of Pretoria & Head: Micro Enterprise Finance, ABSA, South Africa

Introduction and Outline Introduction 2003 – Innovation in microfinance in Africa 2005 – Integrating microfinance into formal financial markets 2007 – New options for rural and urban Africa 2009 – Affordable access for low-income African entrepreneurs 2011 – What will be the theme and where will it take place? Themes tell a consistent and evolving story – focus on access Expanding access…but access still the major challenge in Africa Question, what prohibits access, several aspects, income (pricing and volume) and cost (to MFI and to client) Cost side important driver, cost to client and cost to institution Understanding client reality and cost to client of paramount importance Conclusion and vote of thanks

Introduction

2003 – Innovation in microfinance in Africa

2005 – Integrating microfinance into formal financial markets

2007 – New options for rural and urban Africa

2009 – Affordable access for low-income African entrepreneurs

2011 – What will be the theme and where will it take place?

Themes tell a consistent and evolving story – focus on access

Expanding access…but access still the major challenge in Africa

Question, what prohibits access, several aspects, income (pricing and volume) and cost (to MFI and to client)

Cost side important driver, cost to client and cost to institution

Understanding client reality and cost to client of paramount importance

Conclusion and vote of thanks

Good growth 1998 to 2006 Based on analysis of the MIX reports

Good growth from 2006 and 2007 by region 160 MFIs surveyed in 2007 (111 in 2006) reaching 5.2 m borrowers ($2.5 b) and 9 m savers ($2.1b) 25% growth in borrowers 31% growth in savers Different for: Central: decrease in number of borrowers, lowest penetration by MFIs East: highest numbers, large scale lenders Southern: largest growth in borrowers, greatest increase in average loan size, banks most important West: Deposit taking institutions like banks, cooperatives broadest outreach

160 MFIs surveyed in 2007 (111 in 2006) reaching 5.2 m borrowers ($2.5 b) and 9 m savers ($2.1b)

25% growth in borrowers

31% growth in savers

Different for:

Central: decrease in number of borrowers, lowest penetration by MFIs

East: highest numbers, large scale lenders

Southern: largest growth in borrowers, greatest increase in average loan size, banks most important

West: Deposit taking institutions like banks, cooperatives broadest outreach

“ Private sector” entry is pervasive…

Performance improved, but… Portfolio quality improved, also due to cleaning of portfolios All regions reached operational self sufficiency in 2007 More borrowers served by financially self sufficient MFIs than ever before Still good portfolio numbers per field officer and staff member But increases in operational costs…

Portfolio quality improved, also due to cleaning of portfolios

All regions reached operational self sufficiency in 2007

More borrowers served by financially self sufficient MFIs than ever before

Still good portfolio numbers per field officer and staff member

But increases in operational costs…

Outreach in Africa “ Research is making it increasingly clear that expanded financial access can increase growth, increase incomes of the poor, and reduce income inequality, but the mechanisms by which it creates those effects remains uncertain” * We still have a distance to go to improve access in Africa and our cost of access is high Distance, infrastructure, people, systems, PAR *Barr, Kumar and Litan (2007) Building Inclusive Financial Systems: A Framework for Analysis; Figure 1 and 2 from Demirg üç-Kunt, A, Beck, T and P Honohan. (2008). Finance for All? Policies and Pitfalls in expanding access. World Bank, Washington DC

“ Research is making it increasingly clear that expanded financial access can increase growth, increase incomes of the poor, and reduce income inequality, but the mechanisms by which it creates those effects remains uncertain” *

We still have a distance to go to improve access in Africa and our cost of access is high

Distance, infrastructure, people, systems, PAR

Observe strong innovations on the transactional side So what is mobile (phone) banking? Notwithstanding definition, a new trend, largely created in Africa Conventional - savings first and credit first approaches But, seeing the third option, transaction first approaches Driven by technology and the mobile phone platform Challenges: Can banking services keep up? How do we keep the relationship part of banking (banking crisis)? Are we sure we are working on cost to client within reach? Are we working on more than transactions, e.g. client financial education? How do we transform this type of access in sustainable economic development, growth in all sectors and areas and reduction of poverty?

So what is mobile (phone) banking?

Notwithstanding definition, a new trend, largely created in Africa

Conventional - savings first and credit first approaches

But, seeing the third option, transaction first approaches

Driven by technology and the mobile phone platform

Challenges:

Can banking services keep up?

How do we keep the relationship part of banking (banking crisis)?

Are we sure we are working on cost to client within reach?

Are we working on more than transactions, e.g. client financial education?

How do we transform this type of access in sustainable economic development, growth in all sectors and areas and reduction of poverty?

What should be the reaction – Public Sector? Ensure understanding of the local financial market, the actors and the clients before making rules Supporting permanent, local financial institutions rather than direct engagement by government Support technologies, systems that help to provide range of products through relevant delivery systems Make sure that rules and regulations are relevant, take more than microfinance in consideration, and test the impact to see whether you get the envisaged results Ensure emphasis and implementation of consumer financial literacy, as it is the foundation of a healthy informed market Guard against over-regulation, over-compliance and killing innovation

Ensure understanding of the local financial market, the actors and the clients before making rules

Supporting permanent, local financial institutions rather than direct engagement by government

Support technologies, systems that help to provide range of products through relevant delivery systems

Make sure that rules and regulations are relevant, take more than microfinance in consideration, and test the impact to see whether you get the envisaged results

Ensure emphasis and implementation of consumer financial literacy, as it is the foundation of a healthy informed market

Guard against over-regulation, over-compliance and killing innovation

What should be the reaction – Private Sector? The poor as clients can be profitable And services must be affordable for the client Leveraging private sector infrastructure can play an important role in improving outreach and quality of outreach Private sector participants should thus be broader than just banks Base of the pyramid protocol important – co-creation Many roles exist for the private sector: provide capital build infrastructure developing new products, channels, services and technologies; improving human and institutional capacity

The poor as clients can be profitable

And services must be affordable for the client

Leveraging private sector infrastructure can play an important role in improving outreach and quality of outreach

Private sector participants should thus be broader than just banks

Base of the pyramid protocol important – co-creation

Many roles exist for the private sector:

provide capital

build infrastructure

developing new products, channels, services and technologies;

improving human and institutional capacity

What now, we have a crisis? Public Sector: Do not rush to regulate, you may hurt the poor Assist with enabling environment for savings Rethink parastatals involvement, maybe also in partnership with private sector, once again savings focused Rethink strategies and at different income levels: Micro Enterprises Small Businesses Medium Businesses Do not take the eyes of consumer financial education, best monitoring Private Sector: Beware of short term views and reactions, cut fat, not muscle Rethink products at different income levels, keep cost to client in mind Always emphasise savings Think low cost solutions, transactional platforms

Public Sector:

Do not rush to regulate, you may hurt the poor

Assist with enabling environment for savings

Rethink parastatals involvement, maybe also in partnership with private sector, once again savings focused

Rethink strategies and at different income levels:

Micro Enterprises

Small Businesses

Medium Businesses

Do not take the eyes of consumer financial education, best monitoring

Private Sector:

Beware of short term views and reactions, cut fat, not muscle

Rethink products at different income levels, keep cost to client in mind

Always emphasise savings

Think low cost solutions, transactional platforms

To conclude Evidence shows inclusion impacts positively on the poor In Africa (and elsewhere), it seems that for profit institutions operating at scale can make a difference in terms of reach By implication also in terms of impact on the poor Trends show we have expanded reach in Africa over the recent past, but still many excluded and costs are high Thus challenge to expand reach, ensure appropriate financial products, demanded by low-income and poor and most important – affordable access in cost to client terms Transactional drive as ice-breaker show promising results, but be careful…

Evidence shows inclusion impacts positively on the poor

In Africa (and elsewhere), it seems that for profit institutions operating at scale can make a difference in terms of reach

By implication also in terms of impact on the poor

Trends show we have expanded reach in Africa over the recent past, but still many excluded and costs are high

Thus challenge to expand reach, ensure appropriate financial products, demanded by low-income and poor and most important – affordable access in cost to client terms

Transactional drive as ice-breaker show promising results, but be careful…

The organisers for inviting me and congratulations with the wonderful conference they have created Those who commented on several versions of this paper, largely drawn from the work of the African Microfinance Action Forum Sources used and people consulted – AMAF , CGAP, MIX You the audience, for supporting this conference, and ensuring that it will be a resounding success Our sponsors for generous support In the end, these are my views…setting the scene for what is to come in the next few days, all that is left to say is, over to you and enjoy the conference Thanks to

The organisers for inviting me and congratulations with the wonderful conference they have created

Those who commented on several versions of this paper, largely drawn from the work of the African Microfinance Action Forum

Sources used and people consulted – AMAF , CGAP, MIX

You the audience, for supporting this conference, and ensuring that it will be a resounding success

Our sponsors for generous support

In the end, these are my views…setting the scene for what is to come in the next few days, all that is left to say is, over to you and enjoy the conference