5 new microfinance funds were created in 2011, including 2 for $95million in assets or more, such as responsibility Financial Inclusion Fund and the Developing World Markets Microfinance Fund-J. In 2012 support from investors continues to remain sound with 7 new funds either launched or that are targeting mid-2012 closings. Most of these funds are mainly in debt instruments, with increasing interest in equity, such as African Microfinance Fund and ISIS (both equity funds).
Examples include: Fefisol and Rural impulse Fund II : Est. $19million and US $41million in assets as of Dec 2011- created to focus on financial access in rural markets. Oikocredit and FMO plan to structure a Euro 10Million fund targeting only low income countries. Microfinance Initiative for Asia supported by IFC and KfW- announced the launch of a $100million fund focused on microfinance and capacity building in underserved Asian Markets. Additionally, several asset managers have opened offices in SSA in 2011.
The increase is due to a number of factors including consistent GDP growth rates, increased political stability, a growing middle class and reforms that reduce barriers to entry (World Bank
MFIs perform worse there than in other regions, with weaker asset quality (higher PAR and lower reserves for delinquencies) and a higher cost structure.
In fact, some public development finance institutions (DFIs) indicated that they are prepared to invest in almost all SSA countries at this time if they find investible opportunities.
According to MFX solutions, SSA had the most volatile hedge rates in year end-September 2011.
Investment flows and ssa presentation
Microfinance Investment Trends with a closer look at Sub Saharan Africa July 2012
OutlineGlobal trends in investment• Growth rate of MIVs• Creation of new funds• Returns of SMX index• Increased focus on social performance• MIVs focus on underserved marketsTrends in Investment in SSA• Introduction: (financial inclusion landscape; investor landscape)• Barriers to investmentOutlook 2
The growth rate of the 10 largest MIVs is on the rise again Annual Growth Rate of MIV Total Assets Ten Largest MIVs (Total Assets 2011) Source: Highlights from the CGAP market scan Source: Highlights from the CGAP market scan• Total Assets of the 10 largest MIVs grew by 7.2% in 2011 - higher than the 2010 rate but stillbelow pre-crisis levels.• The growth rate increase is attributed to the increased MIV demand for capital, particularly forlocal currency loans. 3
Significant variations in returns, while steady on average MIV Returns based on SMX-USD and SMX-Euro Source: Highlights from the CGAP market scan; and http://www.syminvest.com/•The SMX index had consistent returns in 2011 and 2010 but down from 3.08% in 2009 and 5.5% in2008.• There were significant differences in fund performance within the SMX index eg- TriodosMicrofinance Fund-I Euro shares had 7.9 % return in 2011 v.s. Dexia MicroCredit Fund had .68%. 4
Fund managers have increased their focus on socialperformanceFund managers have made efforts to ensure more responsible placement of their capital.Examples include: Several industry efforts to promote transparency and accountability 54 investment organizations endorsed the Principles for Investors in Inclusive Finance in 2011. Investors are stepping up country level coordination efforts to help prevent overheating and over-indebtedness.Funds are targeting more than microfinance including- agriculture, small enterprises.Examples include: Symbiotics and Oxfam announcing the launch of the Small Enterprise Impact Investment Fund Accion’s Venture Lab for innovative start-upsMIVs are increasingly targeting underserved markets, mostly in SSA, Asia and rural markets- often with the support of DFIs Source: CGAP 2012 Market Scan
SSA displays strong economic prospects: increased FDI inflows, and GDP growth rates Source: UNCTAD Statistics Database• FDI inflows to the region rose from $23 billion in 2006 to $38billion in 2010 (UNCTAD database).• SSA is home to 7 of the 10 fastest growing nations in the world.• The region is stabilizing with fewer conflicts and banking crises since the 1990s and early 2000.(Financing Africa: Through the Crisis and Beyond.) 7
Africa financial inclusion landscape: Low access,poverty still prevalent• Despite this growth, Africa is the region with the lowest share of banked households (12%) and the highest share of poor people in the world with 50% of the population living on $1.25/day. Source: CGAP Financial Access Report 2010 http://data.worldbank.org/topic/poverty 8
SSA investment landscape: Many actors and highconcentration• The region received 11% of global microfinance funding commitments in 2010.• In terms of cross-border investment, it received amongst the lowest levels in the world—$1 billion out of a total of $13 billion as of December 2010, of which Public DFIs account for approximately two-thirds.• SSA investment accounts for 9% of DFI and 5% of MIV global microfinance portfolios.• More than 70 public and private foreign investors have debt and equity investments in SSA microfinance, compared to 94 in LAC and 64 in ECA.• Investors are concentrating in just a few countries: reaching less than half of the region’s 47 countries.• Over half of all DFI direct MFI investments in SSA go to 10 institutions, and 56% of all direct DFI investment is concentrated in five countries. Source: CGAP Brief: Microfinance Investment in Sub- Saharan Africa: Turning Opportunities into Reality 9
Local funding sources play an important role• Local funding, such as deposits, play a dominant role in the funding structure of MFIs• In addition, local government funding sources are available in many countries in the region. For example: • Government programs often operate as funds (e.g., the National Fund for Microfinance in Benin) • Other government programs are registered as companies with majority government ownership. • In some countries (e.g., in Rwanda), the government is an important player in the ownership structures and boards of financial institutions. Source: CGAP Brief: Microfinance Investment in Sub- Saharan Africa: Turning Opportunities into Reality 10
MFI performance lags behind other regions PAR >30 days (Median) Source: CGAP and MIX 2012 and MIX Cross- Market Analysis Database 2010 data• In 2010, PAR greater than 30 days was almost 5%, the highest of all regions, while median operating costs were 32.6% of loan portfolio, above that of other regions.• In addition, a number of MFIs in the region are under government administration including: 17 MFIs in West African Economic and Monetary Union (WAEMU) member countries at the end of 2011 and 3 in Cameroon at the end of 2010. 12
SSA has a large number of smaller MFIs that are often less profitable Source: MIX Market database• SSA has a total of 25 Tier 1 MFIs compared to LAC with 105 and ECA with 62.• This can be explained by a number of factors including: smaller average loan sizes, difficult operatingenvironments, and in many cases less access to capital for growth with small and dispersed capital markets. 13
Weak management, governance and transparency aremajor barriers to investment• Weak management: there are human capital deficiencies at all levels, attributable largely to weak educational systems and the high costs of attracting better educated staff. It is challenging to find skilled senior managers, especially in finance, internal audit, and law.• Governance: the main challenges include conflicts of interest and lack of management accountability (given the closeness of senior management to board members).• Lack of transparency: insufficient or poor reporting standards; limited availability of information on MFIs, and concerns about the reliability of external audits of MFIs. Source: CGAP Brief: Microfinance Investment in Sub-Saharan Africa: Turning Opportunities into Reality 14
Market infrastructure and regulatory barriers also significant Market Infrastructure Regulatory Environment• Only 6 out of 26 countries that have public • While many countries haves strategies and credit registries in SSA cover Microfinance regulations for microfinance,• Penetration level measured by % of adults ▫ 17 countries have adopted national microfinance registered in private credit bureaus is 5%; strategies, 27 have adopted microfinance legislation to date compared to 18% in East Asia; 34% in LAC and 64% in OECD countries. ▫ 29 countries have specialized microfinance laws, in 15 it’s regulated under banking/NBFI laws.• Also, local stock markets are weak or nonexistent, • Nonetheless, challenges remain. Licensing; long limiting equity investors’ exit options delays from approval requirements; cumbersome branch licensing; frequent changes in capital and other requirements; constraints in supervisory capacity Source: Analysis of Key trends: 2011 SSA Africa Regional Snapshot.” CGAP and MIX, 15 And: CGAP Brief: Microfinance Investment in Sub-Saharan Africa: Turning Opportunities into Reality
Macroeconomic instability and political instabilitycontribute to low levels of investment• While investments are growing in stabilizing post-conflict countries, such as DRC, there is still unease about investing in other post-conflict countries, such as Sudan.• The overall business environment remains unfavorable in countries such as Chad, Niger, Burundi, or Central African Republic, while issues with corruption, oil subsidies, and instability hamper investments in Nigeria.• Despite this, many investors have a higher country risk threshold for SSA and are prepared to invest in most SSA countries, motivated in part by their development mission and their commitment to the region. Source: CGAP Brief: Microfinance Investment in Sub-Saharan Africa: Turning Opportunities into Reality 16
The high costs of offering local currency loans• While investors have increased local currency funding to SSA financial institutions, finding affordable hedging instruments is difficult (especially East Africa)• High inflation rates in East Africa have led to rises in hedging costs and consequentially contributed to a recent reduction in the volume of loans closed for East African MFIs.• Investors project costs of hedging in East Africa will not return to reasonable levels until 2013. Trends in the Cost of Hedging Source: MFX Solutions 17
Minimum investment thresholds preclude investments• Given the less developed nature of several SSA country microfinance markets, the institutions often need smaller transaction sizes.• However, incurring transaction costs for small deals raises issues of cost effectiveness.• As a result, leading global fund managers with significant SSA portfolios seem to target larger or Tier 1 MFIs and MFIs that are members of microfinance networks or holding companies.• Also, cooperatives and unregulated institutions present business model challenges for investors: ▫ Many unregulated institutions usually have ownership structures that investors cannot buy into for equity participation, and such institutions pose a higher risk because they are not supervised. ▫ For cooperatives (particularly dominant in West Africa) capital investments are challenging or often not possible. 18
OutlookInvestment managers project:• Continued increase of MFI demand in 2012 and improved growth.• Further expansion into underserved markets-particularly in SSA. In fact public and private microfinance investors interviewed for research are expecting a 20–30 % increase in their SSA portfolio in 2012.• More focus on equity investments. Increased diversification of their portfolios into other impact investing fields such as SME finance and agricultural finance, but at a slower pace.Investment outlook in SSA:• Given market challenges and barriers noted, investors will either have to accept lower returns, or find business models that can lower the cost of handling large numbers of small transactions. 19
Advancing financial access for the world’s poor www.cgap.org www.microfinancegateway.org