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Advancing the african microfinance sector
1.
Copyright ©2008 The African Union Commission 1 Advancing the African Microfinance
Sector The roadmap and plan of action1 Released 31 DECEMBER 2008 The African Union Commission Addis Ababa, Ethiopia 1 The assignment was carried out by Henry OKETCH of TM Maarifa Consultants Ltd. in close collaboration with the African Union Staff at the Department of Economic and Social Affairs. The French Version of this document was translated by el Hadji NIASSE, also in close collaboration with the Department of Economic and Social Affairs.
2.
Copyright ©2008 The African Union Commission 2 CONTENTS I. INTRODUCTION 5 1.1 Justification and Background 5 1.2 Scope and focus of study 7 1.3 The African Political Economy and Philosophy of Microfinance 8 1.4 Some Theoretical—as well as Empirical—Aspects of Microfinance 14 II. PROCESS AND METHODOLOGY 44 2.1 Purpose 44 2.2 Definitions of Key Terms 46 2.2 Arrangement and organization 51 2.3 Process and Methodology 51 Table 5 ‐ Country Networks Surveyed for Primary Data 53 III. The State of Microfinance in Africa 55 3.1 Institutional Diversity and Growth 55 3.2 Geographical Diversity 59 3.3 Regional Distribution 59 3.4 Stage of Development 65 3.2 Size distribution of African MFIs 67
3.
Copyright ©2008 The African Union Commission 3 3.5 Product Mix by Type of Provider and Trend 70 3.6 Growth and Financial Performance 73 3.7 Microfinance in its early years in Africa 76 3.8 Latest Developments in African Microfinance 80 3.9 Present day developments and trend 83 IV. INDUSTRY CHALLENGES 84 4.1 Uneven Sector’s Development 84 4.2 Outreach is limited and unevenly spread 85 4.3 High client dropouts 86 4.4 Neglecting to build industry infrastructure 86 4.5 Limited Capacity and Resources 87 4.6 Too Frequent Paradigm Shifts 89 4.7 Mission drift is real 90 4.8 Poor Financial Performance 91 6.6 Industry’s SWOT Analysis 93 4.7 Industry Trends and Future Direction 96 4.8 Some Hard African Realities 102 V. VISION AND PRINCIPLES 109 5.1 Future Developments 109 5.2 Key Principles 110 5.3 Industry Best Practices—A Review 112
4.
Copyright ©2008 The African Union Commission 4 5.4 Goals for Microfinance 118 5.5 Role of the State Government—A Assessment 120 5.6 Role of Local Authorities‐‐an Assessment 126 5.7 Role of Banks 127 5.8 Role of the AU & Regional Economic Communities 128 5.9 Role of Standards and Benchmarks 129 VI. STRATEGIES AND ACTION PLAN 132 6.1 Major Industry Challenges 132 6.2 Proposed Strategy 134 APPENDICES 3 6.3 Action Plan 3 ENDNOTES AND REFERENCES 7
5.
Copyright ©2008 The African Union Commission 5 I. INTRODUCTION 1.1 Justification and Background At the root of the development of microfinance in Africa (just like is the case in other poor countries worldwide) are three fundamental human values and principles—the first of which is a instinct for self‐preservation through self‐help, followed closely by the need for cooperation and collaboration in accomplishing difficult and somewhat more complex tasks at the larger, community level. And the last of these principles –or felt‐needs is (best expressed in Kiswahili as) ‘Mjali Jirani’—or simply ‘care for your neighbour’ in English. Very much like these three values or principles, microfinance has the most meaning—or thrives best –in adversity; it works best when target clients and service providers all cooperate and collaborate through self‐reliance, each doing their best possible with a yearning and sense for self‐preservation being uppermost in their mind. Cooperation and collaboration on the other hand works well (or if at all) when individual team members have a sense of self‐worth and self‐respect, combined with a critical self‐awareness of the greater common good that cooperation engenders, versus the pursuit of narrow personal interests. It is thus so that, the newly emergent microfinance technology is steadily making access to finance a near possibility for the millions of people previously seen as not financially secure‐enough to be granted credit, nor rich enough to tap into their wellspring of grit, hope, and wealth. Because it is highly effective in enabling even the world’s poorest people to engage in gainful self‐employment—and notably protect themselves from shocks by accumulating little savings, the African Union (AU) and several regional economic blocks have all come to consider the development of microfinance in Africa to be of great importance (SADC, 2002; COMESA, 2003; Koma, 2007; Pamacheche, 2007)1 . Hence, the decision by the African Union to commission this study in April 2007, hoping that it could facilitate the elaboration of a road map to guide the development of the regional microfinance sector, is within this context of job creation, economic growth, and poverty reduction/achievement of the Millennium Development Goals (MDGs).
6.
Copyright ©2008 The African Union Commission 6 As outlined by the commission at the beginning of this effort, this plan sets out a minimum set of policies and strategies; including the legal, regulatory, and institutional frameworks, favourable and catalytic to the development of microfinance infrastructure and services within Africa. In addition to strategies and policy areas, the study also outlines the character and size of the African microfinance sector, as it identifies opportunities, strengths and challenges it presently faces. The road map further presents a detailed overview of the good industry practices, and makes recommendations on various responsibilities for microfinance sector development in the AU member states governments—for the public sector itself, local authorities, development partners and/or foreign investors, commercial banks, and the 11 or so regional economic communities. Two independent panels examined and appraised draft roadmap ad action plan in a two‐stage process, this at first involved experts of the African Union Commission Secretariat and, only later, a regional expert’s team towards the end of July 20082 . Significantly, the same African Institute for Economic Development and Planning (IDEP) based in Dakar, Senegal, which has previously hosted major regional policy workshops and seminars in the past was approached by the AU and dutifully agreed to host this ultimate three‐day workshop for microfinance. Of the more important outcomes of this workshop was the definition of the African regional priorities as far as the development of microfinance is concerned (see section 1.5.4 below). The group further notably also agreed on a standard definition of microfinance for the region: “…Microfinance is the provision of a broad range of financial products and services to a large segment of the African population previously excluded from access to financial services by conventional financial institutions by virtue of their social and economic status. Such provision must be sustainable both for the microfinance institutions and for the borrowers3 …” Aside from broadly setting the conceptual boundaries for the sector, the 30 experts assembled in Dakar, Senegal, on 30 and 31 July 2008 stated a vision and desired role for the African microfinance industry, thus: “… Microfinance is a key component of financial systems and aims at changing and improving the lives of the economically and socially vulnerable poor people, creating jobs, and contributing to the development of both the local and the national economy...” 4
7.
Copyright ©2008 The African Union Commission 7 1.2 Scope and focus of study Taking these two definitions of the African microfinance sector as now adopted by the AU, this road map explores several issues prior to making suggestions, for instance, on possibilities of accelerating growth and taking the sector up to the next levels of development. It also presents the story about why and how did the African microfinance sector come into being in the first place, since knowing the past can often help decide where to go to next in a long, difficult journey. For example, the roadmap answers questions such as: Was the emergence and development of the microfinance system in the region an act of accident, or was it the natural outcome of a restless search for real solutions to otherwise repressed needs? Does the African microfinance system share any historical parallels with similar systems that have evolved elsewhere in Asia, Central and Eastern Europe, and/or the Latin American regions? At its present stage of development, what can Africa learn from the other regional microfinance systems (India, 2007; Latin America, 2006; Eastern and Central Europe, 2006; Asia, 2008) that could spice up, improve, or accelerate the growth of its own microfinance system? Secondly, as a system of financial intermediation, does microfinance offer any real hope to the region’s more than 600 million people relentlessly looking to improve their lives and lift themselves out of poverty? Under what circumstances and conditions does microfinance provide the most hopeful answers to the region’s poorest families and individuals struggling to improve their lives? Can microfinance become a real solution (or part of the solution) to halving poverty and achieving other Millennium Development Goals (MDGs) within member states of the AU? Who among those who need microfinance most in the region at present are able to have access to the products and services well‐adapted to their needs, and how well satisfied do they feel about them, affordability, and the quality of services so far obtained from the different market players or providers? Do they feel valued enough, and well protected by the service providers and/or their governments? Is the increasing availability of microfinance across the region changing or influencing the attitude of mainstream financial institutions about the region’s impoverished populations as a potentially new market segment?
8.
Copyright ©2008 The African Union Commission 8 Thirdly, what macro‐economic and policy conditions exists in the region that facilities and/or encourages (hinders and/or thwarts) the development of a vibrant and diverse microfinance sector in the African soil? Can Africa hope to modernize its financial sector anytime soon by learning from the successes of its microfinance system? Is financial integration within the existing regional monetary, trading, and economic blocks possible any time soon, and what specific policy initiatives or strategies would this take to make integration possible? Lastly, how efficient and dynamic is the African microfinance system as compared to similar systems evolving elsewhere in other parts of the world? Does the system have strong and diverse service providers, well adapted and well‐adjusted to survive within the regional environment? What seems to work well or not within the African microfinance system; and what worldwide and regional institutional case examples can the region turn to for valuable lessons, inspiration, or simply best practices? The rest of this introductory section of road map provides a historical account of the development of microfinance in the region, in addition to highlighting its relevance and importance from a regional perspective. 1.3 The African Political Economy and Philosophy of Microfinance The Rise of Modern Microfinance The phrase microfinance is a young one; in fact only emerged in the early nineties. At the same time microfinance activities are not new at all: nearly all continents can show traditional savings and credit systems that date back well over a century and in many cases are still operational today. These traditional systems are simple and effective: a group of people pool their financial resources and make the capital available to some group members to work with it. After a while, the borrowing members return the capital to the members who brought it together in the form of savings. This basic mechanism has been the major liquidity management vehicle for groups and communities excluded from access to the formal financial system for decades, if not centuries.
9.
Copyright ©2008 The African Union Commission 9 The main characteristic of this mechanism is that it is owner‐managed, self‐governed and self self‐capitalized. In fact, these traditional systems are closed systems, making them relatively immune to outside interference. In Africa, these systems come in an amazing variety: Stokvels, tontine, esusu and idir are just some of the local names of today’s Rotating Savings and Credit Associations (ROSCAs). Because these systems are self‐capitalized, they are savings‐driven by nature. This means that they do not have any leverage potential. In rotating systems, a member has to wait for a while before she can access a loan from the group, simply because individual group members borrow larger amounts than they save. Therefore, all members have to save to allow for credit provision to a few. Bringing in the advantage of modern financial systems o modern microfinance daeis commonly raced back to the founding of the Grameen Bank in 197 in Bangladesh. Pooled resources were now leveraged with external credit capital so that many more people could access loans simultaneously. Modern microfinance is therefore often considered to be credit‐driven as opposed to the savings‐driven character of traditional systems. Early day modern operators such as Grameen Bank have held on to the leverage principle ever since. Their clients can only access loans after they have brought in savings regularly for a considerable period of time. The leverage principle usually follows a 1:3 ratio; clients can borrow up to three times the volume of their savings balance, which also functions as a lien to the loan. Today, many practitioners have dropped the direct link between savings and loans and provide credit to whoever is considered eligible. Although it took roots in Africa almost at the same time as it did in Asia and Latin America (sometime in the mid 1970s), the African microfinance system in its present form emerged some 25 years ago; the year 1993 is an important reference period for present‐day microfinance (see Otero and Ryhne, 1994)5 . However, within just these 15 years of its turning point, the system has not only evolved significantly; It has also progressed fast enough to a point where it today alone seems to present Africa with the closest and most hopeful chance of ever developing a more inclusive financial system for its people (Okonkwo Osili and Paulson, 2008)6 . Whether it is the region’s most developed economy (South Africa), or least developed and war‐ravaged economies (Sierra Leone and Liberia), the microfinance system alone currently provides the structures for people previously excluded from the region to save and take loans. As Sodokin aptly notes:
10.
Copyright ©2008 The African Union Commission 10 “… 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 20037 …” While acknowledging the fact that Sub‐Saharan Africa especially suffers from low domestic and foreign investment, high capital flight, and low remittance flows (relative to other developing countries), the ILO also states: “… Access to finance is a vital concern for workers in the informal economy8 …” Kauffmann (2007) also acknowledges the importance of micro and very small enterprises in Africa and their need for microfinance, noting: “… Even in South Africa, with its robust private sector, micro and very small enterprises provided more than 55 percent of all jobs and 22 percent of GDP in 2003, while big firms accounted for 64 percent of GDP…the conditions for private sector growth exist, but are still held back by an inadequate financial system9 …” Two statements from the latest Economic Report on Africa 2008 (Economic Commission for Africa, ECA, 2008) perhaps gives some excellent insight into Africa’s increasingly heightened interest in the development of microfinance. In page 61 of the report covering discussion about the social development trends in Africa, for instance, the author states: “…Promoting a more inclusive development process increases the long‐term growth potential of African countries10 …” Continuing further on page 63, the same author observes: “…The main challenges facing Africans in the labor market are the lack of decent jobs in the formal sector, underemployment and working poverty “…but to improve labor conditions, governments need to promote domestic and foreign investment in sectors that have large impact on employment…”
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Copyright ©2008 The African Union Commission 11 Clearly and implicitly hinted at in the above statement is a reference to the millions of smallholder farmers who derive their livelihood almost exclusively from agriculture and the equally ubiquitous nano enterprises found at nearly every homestead or household throughout the developing nations (Steel and Snodgrass, 2008; Mead, 1995)11 . Yet another hint to the need to develop microfinance in Africa is evidently implied in the stated goal …”to achieve accelerated and sustained growth…”, with both the AU and ECA stressing that … “African governments should maximize the use of all financial resources at their disposal; including commodity revenues, remittances, and particularly domestic savings…”, notably: “…To promote infrastructure, investment, innovation and institutional capacity…” Finally, the ECA 2008 report ends with an emphasis on more efforts to boost domestic savings and calling upon Africa to use it (the resource) as a critical and stable source of financing for development. Specifically, on page 125, ECA states: “… The emergence of microfinance institutions has created opportunities for access to credit for smallholder farmers and small businesses (ECA, 2008)…” ECA further highlights the fact that: “… Existing financial institutions are thinly spread and inefficient in mobilizing domestic resources “…thereby underscoring the relevance of the former in the region’s new development focus and efforts…” In addition to sustained and ambitious policy reforms to make doing business easier and more attractive in Africa, all recent international discourse on how to accelerate growth and simultaneously reduce poverty in the region identify the lack of financing as the primary obstacle12 . The African economies especially suffer from very low levels of domestic savings and very poor access to international capital markets13 . Hence, the mobilization of domestic resources and external finance is critical to the success in obtaining resources to finance the investment needed to move the African economies to higher levels of growth and development, and to drastically reduce levels of poverty that continue to plaque the continent.
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Copyright ©2008 The African Union Commission 12 A major change in the recent discourse on Africa’s development is the new emphasis on domestic savings mobilization at the expense of the previous dependence on foreign aid and trade to spur growth and reduce poverty. And this essentially because the latter source of financing is far less volatile in nature and temperament than all other external forms or sources of development financing. Secondly, as compared to external sources of financing for development, a reliance on domestic savings does not necessarily increase the vulnerability of the local population or development plans to sudden, unexpected external shocks and influence—as is often the case with foreign sources of funding. And, perhaps most importantly, the untapped pool of domestic savings is huge and likely to be reasonably‐priced as compared to foreign sources of capital. The fact that domestic savings for Sub‐Saharan Africa as a proportion of Gross Domestic Product (GDP) is roughly just 17 percent (Table 1), means that it is a potentially important source of financing for the region’s development if effectively (and fully mobilized). Table 1 Financing of Development: Sources, Flows, and Trend; from 1998 to 2008 (in $bn.) Financing Source/Year 2008 2007
2006 2005 2004 2003 2002 2001 2000 1999 1998 Remittances 14.4 Private capital flows; FDIs 16.7 28.5 20.7 15.8 6.3 12.1 9.9 16.7 13.7 Equity flows –net 24.7 18.0 14.3 9.1 14.0 10.7 18.0 15.5 FDI inflows 17.6 11.3 13.6 9.5 15.0 6.5 9.0 6.9 Portfolio Equity inflows 7.2 6.7 0.7 ‐0.4 ‐0.1 4.2 9.0 8.7 Net official flows Official Development Assistance, ODA 22.9 25.2 25.1 23.3 16.6 10.7 10.7 10.3 10.6 Bilateral aid grants excluding technical coop grants 28.4 24.2 22.0 14.0 10.0 10.0 9.9 10.1 Net debt flows 3.8 2.8 1.5 ‐2.8 ‐2.0 ‐0.7 ‐1.3 ‐1.8 Medium/longterm 2.3 1.7 2.5 ‐1.0 ‐0.1 ‐0.4 ‐0.7 ‐1.3 Shortterm 1.5 1.1 ‐1.0 ‐1.8 ‐2.1 ‐1.1 ‐0.6 ‐0.5 Net debt flows 49.3 ‐3.2 0.8 1.2 2.6 0.6 0.7 0.4 0.5 Source: ECA, 2008 Lastly, for Africa, the reliance on domestic savings gives the people and their leaders the full independence to pursue their priorities without any undue external influence or manipulation by other interested parties who might have the capital but harbour selfish goals.
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Copyright ©2008 The African Union Commission 13 The first UN‐hosted forum to debate domestic resource mobilization, i.e., The International Conference on Financing for Development held in Monterrey city, Mexico, in 2002, acknowledges the prominent role for microfinance, noting: “…Domestic investment by micro and small‐scale enterprises is the primary source of economic growth and employment creation in Africa…” On its part, the 2004 Ouagadougou Summit Declaration and Plan of Action14 also identifies microfinance as a priority for the region, and so is the 2006 Conference of African Ministers of Finance, Planning, and Economic Development who reiterated the need for Africa to tap the dynamics of microfinance for job creation and income security in Africa, noting: “… The financial systems in Africa are ill‐equipped to collect small deposits … [Hence], to enable microfinance providers to emerge, grow, and reach out to the poor in greater numbers, providing a diversity of demand‐driven and affordable financial services such as credit, savings, insurance, leasing, inventory credit, and transfer … governments need to enact [relevant and responsible financial] policy and strategy” … ( emphasis mine). Furthermore, while noting that Africa had a large share of the worlds least developed nations, i.e., 34 of 49 (67.3 percent), the Second Africa Advocacy Forum held on 14 November 2002 in New York discussed micro‐credit as a solution for the region in the context of realizing Millennium Development Goals (or MDGs). On this, the conference commented thus: “… Though there is still a great need to mobilize funds to meet the MDGs, available funds have not been oriented towards poverty eradication… a methodology that focus on domestic mobilization of resources for the poorest of the poor with the objective of strengthening their own local institutions, i.e., microfinance, [needs to be developed]…” The conference also stressed the role of traditional solidarity group lending technique, but one that is well adapted to modern conditions (this being a subtle coded word for financial inclusion and sustainable financial services; two of the biggest and long‐ruuning challenges in microfinance development). Secondly, the conference emphasized the role of strengthening local institutions by building on what exists; reinforcing microfinance to empower the African private sector was the third key solution proposed by the forum to build micro‐credit. Lastly, the conference called for a focus on improving efficiency. On its part, NEPAD recognizes microfinance in
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Copyright ©2008 The African Union Commission 14 paragraph 148 of its Framework of Cooperation document as one of the areas in the mobilization of and management of resources where Africa must build strength and systems. Specifically, NEPAD states: “ … National and international policies in support of NEPAD should encourage local savings through microfinance …” In sum, the development of microfinance is a very important goal for Africa, which holds promise not only for growth and poverty reduction, but also for the opportunity of empowering the long‐excluded population financially. To highlight the innovativeness of microfinance, Sherief and Sharief (in an undated paper), for instance, states: “…one of the most intractable economic problems for poor countries has been the high price or outright unavailability of credit in [poor rural and urban] communities. Primarily because of weak institutional infrastructure in rural and poor urban areas, formal sector banks and other financial intermediaries have faced seemingly insuperable information asymmetries and consequently have experienced persistently high costs and default rates15 ...” Thus, the emergence and evolution of microfinance in the last 25 years worldwide is of great and particular interest to Africa; for more background information to this argument see Gulde et al (2006)16 . 1.4 Some Theoretical—as well as Empirical—Aspects of Microfinance Access to financial services matters to all people, rich and poor17 . According to Allen Hammon of the World Bank Institute (n.d2 )18 : “… Being poor does not eliminate anyone from the need to engage in commerce and market processes: virtually all poor households trade cash and labor to meet a significant part of their basic daily needs…” Secondly, a nation’s financial system provides an important link between its current and future output and consumption. When a farmer takes a loan to buy seeds and fertilizer to improve per unit hectare yield, for instance, he or she is essentially bringing forward 2 Not dated source
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Copyright ©2008 The African Union Commission 15 consumption against future income. In the same sense, firms would not be able to raise capital to finance investment in machines and equipment without the help of a well‐functioning financial system‐‐ unless they have accumulated enough profits in the previous years of operation. Similarly, a cash‐constrained farmer would not be able to provide the best or full education of his/her children on the strength of his or her future income, unless he or she has access to a reliable and well functioning financial system today. The famed link between access to finance and poverty reduction discussed above in section 1.4 has been tested and proven in the recent past (e.g. Murdoch and Aportela, 2006)19 . One of the studies exploring this link in India, for instance, found strong and systematic drops in the levels of rural poverty of 0.34 percent for every per unit increases in number of rural banked locations. Even far back in history, while writing about capital in 1943, the renowned Austrian economist Joseph Schumpeter, for instance, had also made a similar observation between links in improved access to fiancé situation to poverty reduction. In his very words: “… Capital is the tool with which talented newcomers are empowered and freed from the disadvantages of birth that would otherwise arise from their lack of inherited wealth and absence of connections to the network of well‐off incumbents20 ...” In a more recent period, the United Nations Advisors Group on Inclusive Financial Sectors (UNAG) itself has similarly noted, thus: … "Access to financial services provides a safety net to families, communities and countries so they can better cope during challenging times… "These financial services support innovations in agricultural production, food security and small‐scale farming and should be considered as an important long‐term remedy to affect conditions like those that led to the current food crisis21 …” In his earlier analysis of capital, Schumpeter actually demonstrated the link between access to finance and the expansion of economic opportunities, through a leveling off of the playing field, i.e., access to credit also provide the outsiders and the poor a chance [to compete for gainful economic opportunities]. Beck, Demirguc‐Kunt, and Levine (2004)22 , as cited in la Torre, Gozzi, and Schmukler (2006), also found positive links between access to capital and economic growth, i.e., in countries with higher financial sector depth, the income of the poorest 20 percent of the population seems to also grow faster than the average GDP per capita, whereas income
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Copyright ©2008 The African Union Commission 16 inequality instead drops off or falls at a much higher rate. Moreover, without access to credit, many profitable investment opportunities — for example the creation of new firms and innovation — would simply just not take place. Lately, monetary economists see another role that microfinance institutions are also increasingly performing very well, much beyond their initial goal of just being able to provide the poorest with micro‐credit or facilities for managing micro‐savings for job creation and improvement of incomes23 . The monetary impact of MFIs’ activities is realized through the wholesale loans advanced by commercial banks for on‐lending to the retail‐level customers. Secondly, since many MFIs themselves rely on banks in disbursement and collection of loan repayments from retail‐level microfinance clients—their ultimate customers, the first among monetary economists to study their industrial behavior more closely seem to see accounts which they maintain with the banks as some kind of de facto ‘super deposit accounts’ (Sodokin)24 . In yet another sense, these monetary economists also see MFIs to be actively involved in creating new money income, i.e., generating positive purchasing power, whenever their credit‐granting activities cause their customers to make investment surpluses that far exceed the savings mobilized and intermediated from the same clientele. Thus, new specific money comes to being from their lending and savings mobilization activities—even if the funds so mobilized are compulsory savings or treated by the MFIs simply as a bank would treat a fixed security advanced by a customer against a loan. 1.5.1 Microfinance and Poverty Reduction In the first instance, if an improved access to finance situation can actually unleash the investment and production potential of the poor people directly, it should be encouraged and supported more actively and aggressively. Consider that Africa has been politically independent for at least 50 years; for nearly as long as Asia and Latin America, the other two continents once colonized by Europe, yet it is only in the region worldwide where the largest number and most of the poorest people still live in abject poverty, that is, without adequate food, shelter, or human security (Figure 1).
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Copyright ©2008 The African Union Commission 17 Except for a brief period of 10 years just after independence, Africa’s economies and institutions all stagnated or collapsed soon after within a decade, and were to remain so for most of last 50 years. Throughout the 1970s, 1980s, and the better half of 1990s, African
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Copyright ©2008 The African Union Commission 18 economies nearly failed to produce even enough food for their fast growing populations, create jobs, raise incomes, or even broaden their access to basic social services such as health care, education, and security until just 8 years ago (Figure 2). In 1984, for instance, the region with the highest share of the world’s poor (defined as those living on less than US$ 1 per day), with 44 percent of the total, was East Asia. One third was in China. However, by 2004, East Asia’s share of the poor had fallen to 17 percent (with 13 percent of this for China alone), while the share of South Asia had jumped from 35 percent in 1984 to 46 percent in 2004. But the most striking rise in poverty levels was that in Sub‐Saharan Africa, which boomed from 16 percent in 1984 to 31 percent.
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Copyright ©2008 The African Union Commission 19 While the region’s economies have since 1997 shown some signs of revival, and although the world community, too, seems for once to be more committed to halving poverty by 2015 (through multilateral, bilateral, and shared economic cooperation), regional economic growth for Africa up to 2008 (before the October meltdown of the global financial system) was earlier projected to stabilize at just around 6 percent; but things will definitely get worse with the world economy already in recession. But even before the meltdown, development experts were already expressing fears that Africa’s current poverty levels are just much too high, and still growing rapidly: “… By 2015 when the rest of the world is expected to have halved poverty, a staggering 87 percent of Africa’s population is projected to live on less than US$1 a day25 …” Between 1990 and year‐end 2004, Africa had 70 million additional poor people than it had a decade earlier26 . Noting that Africa received over US$607 billion (or 5 times the amount of development aid)27 since 1970 without any real improvement in living standards, the new regional development thinking is wary of the old‐style poverty reduction strategies28. These strategies underestimated the benefits of engaging the poor people themselves directly in finding lasting solutions to poverty. In contrast to the World Bank and International Monetary Fund (IMF) inspired development philosophy of the bygone era (conveniently coded as Africa’s lost decades), where emphasis was on large scale and accelerated speed of capital accumulation, the new AU approach ( originally thought through by NEPAD) looks for answers to poverty reduction through improvements in people’s capacity to participate directly in development activities and good governance, alongside improvements to the infrastructure and policy environments that are conducive to business. Under the new development paradigm, mobilizing domestic resources in financing development is paramount. Also important is the investing in building local institutions and people’s capacity, expansion of the democratic space, and a strengthening of governance structures at every level of organization. All recent action plans and strategies towards ending poverty, notably the UN’s Millennium Development Project, The Commission for Africa, World Economic Forum 2004 and 2005, and Human Development Report 2005, all clearly seem to place greater access to finance by poor people at a higher level, or par with private sector development as the engines to Africa’s future prosperity and equitable growth. The provision of microfinance, therefore, fits in perfectly with Africa’s new development thinking, which now emphasizes on the direct poor people’s participation in investment and production, also known as pro‐poor growth
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Copyright ©2008 The African Union Commission 20 paradigm shift. In Africa’s new development thinking, therefore, the ability of financial markets to mobilize and intermediate domestic capital for short‐term and long‐term investment and economic development is prominent among the leading strategies. Microfinance – the provision of tiny loans, insurance protection, or deposit facilities for small savings and matching payments systems to the vast population at the Bottom of the Pyramid), using new and unconventional financial technology – has assumed even greater significance for the continent, given the huge unexploited opportunities at the BOP. Others now believe microfinance to be as an important service as any other in its own right and should be encouraged and allowed to develop fully to expand Africa’s financial system. In the short time that it has been available, accumulated evidence shows that when the poor have access to appropriate finance that fits their needs, they do easily increase their economic activities higher levels of productivity and output, and also clearly invest wisely in both short‐term and long‐term households’ assets. Many recent scientific studies of the poor people’s access to and use of financial services29 now show clearly how they take advantage of the services to protect themselves from economic and social shocks, as well as invest in previously unavailable opportunities (Table 2.1)30 . Table 2.1 Typical Loan Application by MFI Clients Options Within the Enterprise Within the 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 Loan repayment 6. Business infrastructure improvement Meeting daily needs or retirement needs 7. Vehicle purchase 8. Buying household goods 9. Ceremony or social expenditure 10. Holiday/leisure expenditure 11. Jewelry purchase Source: Johnston and Murdoch, 2007
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Copyright ©2008 The African Union Commission 21 As shown in the table, the poor (as well as the poorest of the poor) does apply finance smartly to expand or diversify their economic activities or finance their immediate household or individual consumption needs—especially in moments when their immediate resources are either inadequate or totally lacking. Hence, the poorest people at the BOP apply access to finance remarkably well, just as well as their high net worth contemporaries (Table 2.2) 31 . Since the poor already have reason enough to apply access to finance more carefully, towards improving their lives, therefore, what they evidently lack is the opportunity, either because of distance, the absence of facilities, poor handling by providers, or high cost of service. Table 2.2 – Loan Application by Purpose and Level of Income Level of Household Income Loan Application 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 Within the Business
49 55 57 Within the Household 35 43 45 Other 23 6 7 No. of Random Households 69 208 271 Source: Johnston, Jr., and Jonathan, Murdoch, 2007 Clearly, as shown in tables 2.1 and 2.2 above, a large part of Africa’s population currently living in poverty perfectly knows how to work their way out of poverty. However, they do not have access to finance to enable them put their ideas to practice. Specific evidence on the impact of microfinance accumulated over the last two decades shows that improved access by the rural and urban poor—especially when combined with other services such as education—can reduce or completely eliminate poverty32 . Specifically, the literature shows that improved access to microfinance not only leads to increased saving rates among the poor people33; but also that access to appropriately designed and affordably‐priced financial services produces many other positive impacts; including considerable improvements to household incomes, increased expenditure on food and spending on home improvement and education, and the diversification of income base, and (see Figure 1).
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Copyright ©2008 The African Union Commission 22 Source: Dunford, Christopher 2001, pp. 8 Based on carefully controlled panel data of comparisons between women (and their youngest children of up to three years old) with one to three years of participation in Credit with Education, on the one hand, and women in either baseline or control groups, on the other hand, the results unambiguously indicated increased levels of livelihood security among clients—more regular earnings throughout the year, asset accumulation and consumption‐smoothing (Dunford, 2001). Directly citing from Dunford (2001), the specific results from the study (which covered five African countries, three Latin American, and one Asian) shows:
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Copyright ©2008 The African Union Commission 23 With regard to non‐farm incomes in Ghana “… In Ghana, between the baseline and follow‐up periods, Credit with Education clients enjoyed a significantly greater increase in monthly nonfarm earnings— almost double—as compared to nonparticipants in the same communities or residents living in control communities. Clients most commonly attributed their increased incomes to business expansion, reduced input costs as a result of buying in bulk or with cash rather than on credit, and new activities or products made possible by access to loans34 ...” In terms of impact on assets in Burkina Faso “… In Burkina Faso, after approximately three years, borrowers increased the scale of their income‐generating activities by an average of 80 percent, and roughly one‐third of the respondents more than doubled the scale of their activity. Many women were found to have made significant investments in increasing or improving their productive capacity by buying fixed assets, such as aluminum and clay cooking pots, and by establishing regular market sites...” And with respect to helping the poor in better managing shocks and emergencies in Mali “… In Mali, program participation enhanced households’ ability to reduce risk and deal with periods of crisis or economic difficulty. Clients participating for one and two years were significantly less likely than incoming clients to have experienced a period of acute food insecurity or to have been unable to conduct their enterprise due to a lack of money in the preceding 12 months…” In yet another source‐‐after reviewing 32 early impact studies of microcredit, Sebstad and Chen (1996)35 , too, also found positive increases in average enterprise incomes of between 25 percent and 40 percent, while Pitt and Khandkar (1998) 36 in a study involving 1,800 microfinance clients in Bangladesh, found positive changes in household consumption, accumulation of non‐land assets, and improved schooling for children. Remarkably, the latter study showed that 5 percent of the studied clients 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 delivered37 .
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Copyright ©2008 The African Union Commission 24 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 a more improved and more reliable access to finance, as explained by Prahalad (2005)38 . Poverty exists, not just because those affected by it lack the means to improve their wellbeing; it is also because they have limited income, the poor often have to buy things in smaller quantities, hence end up paying more for the same goods and services. And because they do not have their own means of transport, the poor often do most of their shopping locally in more expensive smaller stores. If they are able to secure a loan at all, it is often at a much higher price because of limited supply; but if they get more reliable access to financial services, the poor would overcome all of their disadvantages, as aptly captured by Prahalad: “…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”. In December 2003, while declaring 2005 ‘The Year of Microcredit’, Kofi Annan ( then UN Secretary General); noted thus: “…the greatest challenge before the global community”… in improving the well‐being of those without adequate food, shelter or dignified life… is the constraints that exclude the ordinary people from full participation in the financial sector…” 1.5.2 Microfinance and Job Creation As of January 2007, nearly 600 million people, or 50.6 percent of Africa’s population, were living in absolute poverty, that is, on less than $1 a day. Besides, considering the importance of finance as earlier discussed, the fact that only four percent of the region’s population had access to bank accounts as of year‐end 200639 and just 1 percent bank loans suggests that lack of access to finance is a much deeper problem in the continent than perceived. Notwithstanding the failure of financial sector reforms in the 1980s and 1990s to expand access to finance to the majority of for the general population, the almost simultaneous emergence and development of microfinance in the same period provides a great deal of new hope to Africa to achieve some kind of financial inclusion. However, to realize its goals in this regard, Africa has no choice but to influence the direction and pace of growth of its fledgling microfinance system. This is the first
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Copyright ©2008 The African Union Commission 25 rationale for the AU commissioned road map for advancing microfinance. Through the development of microfinance and linkages with conventional bank and non‐bank financial institutions, it is both possible and desirableto create a new, all‐inclusive financial system for Africa40 . And in the region, microfinance alone most easily and cost‐effectively promises financial inclusion for all in the near future41 . 1.5.3 The Promise and expansion of Microfinance in Africa Emerging in Africa almost without notice three decades ago, microfinance has unexpectedly blossomed into a distinctively prospective new industry for the region; already it has its own growing lingua franca, reporting standards, special rating agencies, ad regulatory and supervisory frameworks, not to mention unique loan loss provisioning guidelines and performance benchmarks. Even completely new careers have emerged, along with specialized courses, faculty, and professional membership associations for the microfinance practitioners. ProFund, established in 1995, was the first ever microfinance investment fund; but currently, there is a proliferation of Microfinance Investment Vehicles (MIVs), on‐line peer‐to‐peer based providers (e.g., Kiva and eBay’s MicroPlace), as well as numerous venture capital and loan guarantee funds. As of 31 December 2007, there was more 100 specialized investment firms focusing solely on the opportunities, which are continuously and rapidly evolving with the new industry on a daily basis. By end of December 2007, even leading global merchant and investment banks, e.g. J.P Morgan and McKinsey, all had moved into microfinance. Similarly, worldwide leading rating firms such Moody’s and Standard & Poor’s had already repositioned for entering the new market. Projections show that in the next 10 years, microfinance will grow 10‐fold worldwide to become a market of assets worth more than $250 billion42 . Furthermore, microfinance is proving to be such a promising investment opportunity that even some of the regulated financial intermediaries that once found the retail‐end of the BOP market unattractive are rethinking their future. Indeed, many banks are in a phenomenon dubbed by the industry as ‘downscaling’ moving into or exploring entry to the market. A survey of profit‐driven providers of microfinance by CGAP43 in 2004 identified 124 such organizations; but after just another period of two years, the number of profit‐driven or commercial microfinance institutions had increased to 227 financial intermediaries
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Copyright ©2008 The African Union Commission 26 worldwide44 . It seems, therefore, that if it is developed properly and aggressively, microfinance is an economic and financial activity that could help create the jobs that Africa currently badly needs to spur growth and reduce poverty levels. In spite of its humble roots, microfinance combines the best of ideas, on the one hand, from mainstream financial providers, and, on the other hand, the ubiquitous informal self‐help financial systems evolved by the poor people themselves. This last system evolved most notably in Africa under colonial policies that forced monetization of the economy through forced labor, but paradoxically limited the natives access to finance. Because of its humble origins, microfinance has evolved into a unique and dynamic system of financial service capable of meeting the diverse financial needs of the vast population at the BOP. Not surprisingly, therefore, rather than the poor people fearing, mistrusting, or electing not to seek microfinance; as they previously did conventional financial service providers, they actually have (in very large numbers) embraced and applied it enthusiastically in bettering their lives. As of year‐end 2006, more than 133 million poor families were using microfinance worldwide and changing their lives45 . Yet, judging from its demonstrated impact, microfinance could be the intervention that finally helps Africa to achieve the Millennium Development Goals (MDGs)46 . As Africa strives to halve poverty by 2015, a well‐functioning microfinance system could open up a world of new and greater opportunities to the region, which currently is home to the highest number of people living without adequate food, shelter, or human security in the world. As mentioned before, Africa alone is home to 50.6% of the world’s poorest people; as at January, 2007. In the past two decades alone, the proportion of people living in poverty increased most rapidly in Africa than it did anywhere else in the world (Figure 3).
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Copyright ©2008 The African Union Commission 27 Worryingly, Africa is also the only continent that is not likely to halve the number of its poorest by 2015 under the UN‐sponsored Millennium Development Goals. But there is hope that microfinance and gains from further policy reforms can enable the region to meet the MDGs. Accumulating evidence over the last two decades shows that greater access to microfinance by the poorest can result in poverty reduction. Specifically, the literature shows that greater access to microfinance not only leads to increased saving rates among poor people as compared to those without any access47 , but it also produces wider range of positive impacts on the poor. These include
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Copyright ©2008 The African Union Commission 28 household incomes, spending on home improvement and education, diversification of income base, and expenditure on food48 . Further, as a new type of business organization in Africa, microfinance is a valuable source of employment and incomes49 ’50 . For instance, in 2006, in the CEMAC area alone, the microfinance sector directly employed 10,300 people in an activity that previously did not exist just 25 years before then51 . In the same period, microfinance institutions in the UEMOA sub‐region employed almost a similar number of people — 11,250 to be exact. In this sense, the road map can help the region to plan how to maximize growth and development of the sector to expand job opportunities and increase incomes directly and indirectly. The median number of people now working for various microfinance institutions in Africa, for example, is 285, while each of the institutions has a total outstanding loan portfolio of $9.1 million in terms of assets. With respect to job creation and enterprise development, therefore, it means that these alternative financial intermediaries have moved to the upper end of medium‐sized enterprise bracket, much cherished by Africa and dubbed as ‘the missing middle’ or competitive enterprises with good growth opportunities (Figure 4.1).
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Copyright ©2008 The African Union Commission 29 0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00 (inUSDmillions) Source:INAFI Africa 2007 Figure
4.1. Current Scale of African MFIs Operation (At 30/09/2007) Deposits Active Gross Loan Portfolio 1.5.4 Some Current Weakness Despite rapid growth and expansion, the continent’s microfinance infrastructure remains weak as compared to systems in other regions (Beck, Thorsten, and Asli, Demirguc‐Kund, (2008)52 . For instance, towards the end of the 1990s, Africa had 45 percent of all operating microfinance institutions globally53 , while Asia and Latin America each had 36.4 percent and 18.6 percent.
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Copyright ©2008 The African Union Commission 30 While the number of MFIs in Africa has evolved steadily as it has 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 4.2). 0 10 20 30 40 50 60 70 80 0 20 40 60 80 100 120 140 %coverage millionsofpoorestfamilies Figure 4.2. The Proportion of Poorest Families with Access (in millions) Per Region At 31/12/2006 Poorest families (in
millions) Coverage (in millions) %Covergae of poorest families) 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 7.1)54 .
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Copyright ©2008 The African Union Commission 31 Moreover, while there has been tremendous growth in outreach, the recent ratings indicate that profit‐driven African MFIs are on drifting away from serving the poorest and most vulnerable populations. The estimated average loan size relative to income per person has risen 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 per person. A few of the transformed or inspiring to transform microfinance institutions 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% of the GDP and loan size of 50% of the African average, is found in Uganda. East Africa has some of the deepest reaching MFIs in the region. In spite of its potential for poverty reduction and enterprise development, and (despite its widespread acceptance and recognition in the region), access to finance in general and microfinance in particular remains severely limited in Africa. Altogether, just about 4 percent of the estimated 600 million poorest residents have any access to finance of any kind (Figure 4.3)55 .
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Copyright ©2008 The African Union Commission 32 0.0 2.0 4.0
6.0 8.0 10.0 12.0 14.0 16.0 Angola Mozambique Gabon Zimbabwe Seychelles Central Africa Republic Guinea Sudan Togo Malawi Cote d'Ivoire Cameroon Mali Tanzania Benin Cape Verde Figure 4.3. Population with access to MF (%) The most optimistic of current estimates of access to financial services in Africa today suggests that, not more than 20 percent of the region’s total adult population have an account at a formal or semiformal financial institution56 . 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
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Copyright ©2008 The African Union Commission 33 sub‐region, as indicated in Figure 5 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 institutions being established becoming fewer, but also the number of new microfinance customers in some of the more advanced markets starting to slow down or decline. 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 as well (Figure 5). For instance, the African MFIs have relatively smaller average loan portfolios, higher loan operating expense ratio, but more notably lower returns to equity and assets.
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Copyright ©2008 The African Union Commission 34 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 annually in microfinance 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 growth57 . 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 4). Just 7 percent of MFI investments made by 39 MIVs (Microfinance Investment Vehicles) are in Africa.
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Copyright ©2008 The African Union Commission 35 And among the international financial institutions such as the World Bank or IFAD (International Fund for Agricultural Development), only 6.4 percent of total investments in 2005 was placed in Africa; initially, this was a mere 1.3 percent. As of April 2007, investors in African microfinance institutions were 14, excluding the International Finance Corporation (IFC) and Africa Development Bank (AfDB), which have also invested in microfinance institutions in the region. IFC’s worldwide microfinance portfolio is USD 260 million. Another important source of investment funds for microfinance in Africa include AFD and USAID, which both also place the bulk of their investments in Latin America (37 percent) than in Africa (18 percent), while the bulk goes to MFIs in eastern Europe and countries formerly under the Soviet Union like Poland, Yugoslavia, and Bosnia, etc. Table 3 Distribution of MIVs (USD, Millions) at 31 December 2006 Region Private funds Public investors
All investors Total No. of Recipients Debt Equity Debt Equity Guarantees 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 A new development in Africa is the entry of Asian‐based microfinance institutions in the African market. These are notably from India and Bangladesh. BRAC already has operations in Tanzania, Sudan, and Uganda, while Grameen bank has partnerships in Uganda, Ethiopia, and Morocco. Apart from these Asian MFIs, there are also European and American investment banks making entry in African microfinance, including ProCredit Holdings of Germany, Access Holdings of France, and ACCION International of USA, mostly through
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Copyright ©2008 The African Union Commission 36 acquisitions and mergers. Within the region, there are also mergers, for instance between Equity Bank in Kenya and Uganda Microfinance Ltd (UML). And earlier, there were mergers between Microcredit Kenya and UMU, the predecessor to UML. What is shaping and driving these new developments? Are these new developments to be celebrated, feared, or encouraged at the expense of what is the traditional? 1.5.5 Summary Points and Direction for the Sector The study commissioned by the AU clearly indicates that the African microfinance system is at different development stages in different countries, including some that are still at the take‐off stages, others at the growth stage ‐‐with well developed and fast growing markets, and still other at the maturity stage or facing decay, decline and/or stagnation. Among the factors to consider while assessing the level of development of the sector in different parts of the continent, the major ones would seem to include the following: 1. Institutional diversity that includes cooperatives, MFIs, NGOs, and commercial banks; 2. Scale of outreach, as evidenced by a large number of borrowers, large number of savers and a wide branch network; 3.
Number of providers that are institutionally and financially self‐sustaining, with a presence of good leadership, strong governance and effective information system ; 4. Diverse product base that could include a host of products and services like commercial credit, housing credit, micro‐insurance, leasing, agricultural finance, savings, money transfer, etc; 5. Closeness or distance of retail institutions practices and performance from the perspective of international best practices as evidenced by cost of lending, return on investments, and customer satisfaction, etc; 6. Affordability of Service; 7. Competitiveness, cooperation, and market discipline among providers;
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Copyright ©2008 The African Union Commission 37 8. Degree of integration of MFIs into the overall financial system of the country; 9. Degree of integration of MFIs into the overall macroeconomic policy framework; 10.
Level of co‐operation and co‐ordination among stakeholders; 11. Quantity and quality of resources dedicated to microfinance; 12. Pool of talent and human resource base; and 13. Speed and direction of growth of the sector. The experts’ team acknowledged and made salient comments on the general state of microfinance in the sub‐regions, as follows: 1. Where there is ineffective regulation, there is a problem of recruiting capable MFI staff, e.g. Chief Executive Officers (CEOs) and Chief Finance Officers (CFOs); 2. The objective of microfinance is to help in poverty alleviation efforts. However, high interest rates are causing opposite results in some countries; 3. As banks downscale, they poach staff from MFIs, thereby weakening these institutions considerably; 4. Non‐discretionary or smart subsidies from governments hinder development of MFIs, as this promotes dependency and undermines market discipline; 5. Even though microfinance can contribute significantly to economic growth and development, it is not a panacea for all of Africa’s problems; 6. Microfinance cannot be discussed in isolation; it has to be discussed in relation to other challenges such as the needs for land reform, improve infrastructure, create environments friendlier or more conducive to doing business, and better and/or an improved access to national resources and ownership issues;
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Copyright ©2008 The African Union Commission 38 7. The AU should expand the introduction of the Roadmap to include current development challenges and the role of microfinance in the achievement of Africa’s development objectives; 8. The Roadmap should show an assessment of the impact of microfinance on a regional basis, drawing from the field visits; 9.
There is need to prioritize the recommendations in the Action plan; 10. The statistics in the Roadmap need to be updated on a continuous basis; 11. African governments should be sensitized about the role of regulation of MFIs; 12. The Roadmap should specifically address the financial needs of women, the youth and people living with HIV/AIDs; 13. The Roadmap should include an analysis of the impact of MFIs on poverty eradication, job creation, savings culture, etc; 14. As some NGOs transform into commercial entities, the AU should facilitate the documentation of such transformation in Africa to provide reference; in the transformation process, care must be taken to prevent, minimize, or avoid mission drift altogether; 15. The Roadmap should include strategies in business development services for both MFIs and retail‐level clients; 16. There is need to give special attention to the poor, gender and the people so far still excluded from the system, i.e., the most vulnerable groups; 17. There is need to clarify the terms “capitalization” to include (financial and technical) aspects of capacity building; and, 18. Within the context of the crosscutting nature of gender issues, it was recommended that gender be mainstreamed in the Roadmap by ensuring that the following gender‐specific recommendations are included in each theme: • Eliminate gender discriminatory practices contained in new MFI policies; • The development of new MFI policies should be home grown, and involve all stakeholders, including women; • The proliferation of MFI products from the traditional banking sector should comply with microfinance characteristics and components; and
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Copyright ©2008 The African Union Commission 39 • The expansion of current 4% coverage in financial services and 1% in credit services must be scaled up to respond to the urgent need to enhance the micro and SME sector to formal private sector enterprises within the context of industrialization objectives of the African Union. The team observed that AU’s plan to incorporate microfinance into the broader realms of economic growth and poverty alleviation efforts was a welcome and timely move. However, in order to ensure that AU’s efforts bear fruit, other stakeholders must be sensitized to play their roles more effectively. Key stakeholders identified by both groups include African governments, MFIs, country/regional MF networks and other external investors. The groups made recommendations for each of the stakeholders and these recommendations support or are additional to recommendations already documented in the Roadmap. The recommendations cut across several themes, but the major ones are related to regulation, funding, research and development and capacity building. The meeting made the following recommendations: A. African Governments 1.
It was a general consensus that governments need to be part and parcel of microfinance development, especially in providing a conducive environment for microfinance to prosper; 2. While governments should not be direct microfinance providers, they should play a strong facilitation role by ensuring that, effective laws that support development of microfinance are enacted within reasonable time limits. They should support development of effective policies, and such policies should be geared towards an all inclusive financial sector; 3. Provide and/or motivate MFIs and other financial service providers to extend outreach to the rural areas who are greatly disadvantaged because of high delivery costs due to inadequate infrastructure; 4. While drafting microfinance policies and regulations, there is need for adequate consultation of all relevant stakeholders, for example, MFIs, cooperatives, relevant government ministries and central banks so that best practices can form the basis to inform such a process, and also ensure that the policies reflect African realities; 5. Some consumer lenders are generally interested in profit and not socio‐economic growth. Therefore, the governments need to ensure that there are laws that protect consumers from worsening poverty conditions caused by consumer loans;
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Copyright ©2008 The African Union Commission 40 6. Given the capacity constraints in the microfinance sector, there is need to create/support training institutions that run specialized microfinance courses; 7. There is need to conduct gender disaggregated assessment of the resources required to reach the sections of the population that are not currently served by MFIs; 8.
While African governments pursue liberalization policies, efforts should be made to encourage local investors to participate in the microfinance sector; 9. African governments need to work on an enabling environment for Microfinance: secure access of low income people to all microfinance services and products (including savings, micro‐insurance and money transfers); 10. African governments need to support MFIs by funding capacity building initiatives and research; and 11. The African governments should ensure that the central bank regulation officers have the necessary capacity to supervise the microfinance sector. B. Recommendations to African MFIs There is strong evidence to suggest that African MFIs can do better in many areas of performance various factors despite the shortage of funds; for example, the experts team observed that many of these MFIs import product and service delivery models from outside the region, but do very little in terms of adapting them to the local context to make them more relevant or responsive to the local needs. Some key recommendations directed to MFIs include: 1. That MFIs should emphasize investments in training and capacity building of staff and management systems in order to improve productivity, improve professionalism and quality of lending and deposits’ base; 2. African MFIs should be run along business lines in order to reduce their dependency syndrome; 3. There is need for MFIs to set aside funds for conducting of feasibility studies, and strengthening marketing and training functions. This will help them design and diversify products along customer needs, and hence adopt a demand driven approach as opposed to supply driven approach that is currently prevalent across Africa;
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Copyright ©2008 The African Union Commission 41 4. There is need to explore potential use of ICT to improve scale of outreach; 5. MFIs that are not allowed by the law to offer all types of products should go into partnership for example with insurance companies and post offices or other relevant institutions until the legal environments change; and 6.
Need to offer products at reasonable price for the customers (MFIs need to be more efficient);There is need to pay more attention to innovation of products, service and service delivery; C. Recommendations to African country networks From the discussions the consensus that emerged was that country MF networks do or should play a critical role. There exist networks in almost every country, and there are also regional MF networks in existence, but while some networks are active and vibrant some are dormant. There will be need to coordinate more at the regional level to ensure synergies are developed across Africa. Specific recommendations made for networks include: 1. At the country level, the networks should play a more feasible coordinating and facilitating role bringing stakeholders together in all issues that affect the development of microfinance in the specific countries; 2. There is need for country networks to sensitize and expose auditors to unique features of microfinance to enable them effectively audit microfinance institutions; 3. National and regional networks need to focus on capacity and institutional building of African MFIs; and 4. The regional networks should promote exchange among African MFIs and ensure that they are covering all African regions. D. Recommendations to the African Union The participants were unanimous that the African Union should be a more active partner in promoting the cause of microfinance in Africa, and they made the following specific recommendations: 1. The AU should facilitate the elaboration of an African Microfinance Charter and an implementation mechanism;
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Copyright ©2008 The African Union Commission 42 2. The AU should facilitate the creation of a code of conduct for microfinance in Africa; 3. Integrate the microfinance policies of the RECs in line with other integration programmes manifested on the continent; 4.
The AU should lobby Member States to integrate microfinance into the financial sector and promote the establishment of a diversified, viable and perennial microfinance sector as an integral component of the national financial system; 5. The AU should encourage Member States to promote Public‐Private partnership (PPPs) especially in the area of infrastructure development in order to improve scale of outreach by MF service providers; 6. The AU should institutionalize an annual African Microfinance Forum; 7. The African Union should ensure lobbying to make it possible to generate internal financial resources (in Africa e.g. AfDB); 8. The AU should add a page on microfinance on their website (database for MFIs, consultants in microfinance, links to national and regional networks etc.); 9. Provide support for training and research centers in Africa in the main languages; based on practitioners experience (directly and by convincing governments to do the same); 10. The AU should support MFIs in exploring alternative ways of raising capital e.g. savings mobilization, better use of Diaspora remittances, etc; 11. There is need to develop strategies for the development of sustainable microfinance in conflict and post‐conflict countries; 12. Provide scholarships for MFIs staff to attend training courses; 13. Provide funding for MFIs to do research and support documentation of impact of microfinance on development, for example, through the use of case studies; 14. Support translation of training material in major languages (support second and third line trainers); 15. Support ICT use by MFIs (funding and linkages to donors such as Gates foundation, CGAP and others);
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Copyright ©2008 The African Union Commission 43 16. Set up Innovation grants to encourage MFIs to innovate in microfinance (products, services, use of technology etc.); 17. Set priorities by region/sub region; 18.
Promote exchange, internship and volunteer programmes among MFIs (scholarships); 19. Support the coordination of regional networks; 20. The AU should assist in the development of benchmarks, standards and ratings. In this process, existing benchmarks, standards and ratings should be used as a basis; 1.5.6 Towards a Regional Definition of microfinance The workshop agreed on the following definition of microfinance: “… Microfinance is the provision of a broad range of financial products and services to people with low incomes who, by virtue of their social and economic status, are excluded from conventional financial institutions. Such provision must be sustainable both for the microfinance institutions and for the borrowers... “… Microfinance is a key component of financial systems and aims at changing and improving the lives of people with low incomes, creating jobs and contributing to the development of both the local and the national economy...”
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Copyright ©2008 The African Union Commission 44 II. PROCESS AND METHODOLOGY 2.1 Purpose Notwithstanding the huge enthusiasm for microfinance noted above (Prahalad, C., K., 2005)58 , what does the future really hold for microfinance in Africa? To begin with (and despite the many known benefits of greater access to finance), a majority of the poor African population is still virtually excluded from access to any institutional or reliable financial system from coast to coast (Gulde, Anne‐Marrie, Catherine, Patillo, Catherine, and Jakob Christensen with Kevin Carey and Smita Wagh, 2006)59 . Due to the emergence of microfinance some 15 years ago, access has certainly improved somehow in many parts of the region, but as is underscored by the experts’ workshop in Dakar, Senegal, in July 2008, ‐there are many obstacles and concerns that impede the expansion on a reasonable scale. Thus, to make a notable increase in reaching even more of the large excluded population, new strategies and solutions to further strength and better organize the sector are both urgent and important. Three of the most formidable industry challenges addressed by the road map include (a) the doubly vexing question of how to lower the cost of service delivery while scaling‐up outreach. Secondly, there is the difficult question of (b) how to contain and minimize the disruptive effects of growth and increasing complexity as microfinance evolves and matures into a dynamic system, yet to do so in a manner that still preserves its mission and identity. The third difficult question is how to make the microfinance system a well‐integrated part of the overall financial system, yet allows it to retain its dynamism and responsiveness to the poor alive. All these questions have been addressed in the road map. In this regard, this AU commissioned study and road map presents some ideas and a medium‐term action plan that if implemented could lead to greater outreach and the establishment of a vibrant, professionally run pan‐African microfinance industry. The road map was commissioned in April 2007 by the Africa Union (AU). Within the 2006 to 2008 program activities of the Union titled Mandate, Main Objectives, and Functions: Priority Programs, Major Economic Challenges for Contemporary Africa, the need for this road map is underscored as the AU hopes to raise significantly the level of investment and trade in the region. Specifically, in pages 16 to 50 of the
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Copyright ©2008 The African Union Commission 45 African Union’s institutional framework for mobilizing capital resources originally developed by NEPAD, it targets to increase domestic savings and investments; both foreign and domestic, by tapping into additional resources previously outside the financial system. Tellingly, the organization mentions “national savings by firms and households, which need to be substantially increased” (see page 37 of the said document)3 . Under the umbrella of activities leading to the realization of an African Monetary Union (AMU), the documents explicitly debates about the means and the know‐how to: “… Create a more empathetic environment for banking the presently un‐banked population and a more inclusive attitude to the region’s poor; it will positively affect access, as will attempts at improving the physical infrastructure and technology platform. (NEPAD’s first listed objective remains the eradication of poverty.)…” In the same spirit, Chapter 5 of SADC’s Strategic Road Map (see pages 126 to 127) declares the intention of the regional economic community to: “… Create the conditions for sound financial institutions thereby improve the public trust in the institutions…” Another of SADC’s strategic documents, i.e., RISDP, openly urges member governments to encourage the development of a microfinance sector and financial institutions to provide a fuller spectrum of services to households (SADC RISD Plan, 2003). So far, SADC is the only one of the 14 overlapping RECs in Africa that has thought through a Principles Framework for regional trade and integration in investment and the provision of financial services (SADC, July 200). With the development of this road map, therefore, the African Union joins the SADC region in forging a brighter future for microfinance in the region, considering its importance and great potential. In preparing and disseminating this road map, the Union not only hopes to influence and encourage other smaller RECs to also plan for the development of the sector in their member countries, but also to forge policy harmony and convergence throughout the region. 3 Note that if the current measures of financial depth (M2/GDP, Percentage share of domestic credit to the private sector, ratio of total financial sector assets to GDP) are correct and accurate, the amount of household deposits held in commercial banks in Africa is just a very small fraction of those held informally by small firms and the low‐ income population who are largely excluded.
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Copyright ©2008 The African Union Commission 46 The most outstanding aspect of the road map, though, is its focus on the mobilization of domestic financial resources and development of greater linkages between formal and alternative financial intermediaries as the main drivers to the future growth and development of the microfinance industry in Africa. 2.2 Definitions of Key Terms The overall definition for microfinance within the context of this road map was laid out by the AU during the validation workshop of 30 and 31 July 2008 held in Dakar, Senegal, at the African Institute for Economic Development and Planning (IDEP). In this connection, the official definition of microfinance and stated purpose as treated in this road map is thus as outlined by the AU, thus: “… Microfinance is the provision of a broad range of financial products and services to people with low incomes who, by virtue of their social and economic status, are excluded from conventional financial institutions. Such provision must be sustainable both for the microfinance institutions and for the borrowers…” “… Microfinance is
a key component of financial systems and aims at changing and improving the lives of people with low incomes, creating jobs and contributing to the development of both the local and the national economy…” Nonetheless, from an intellectual perspective; given the dynamic and continuously evolving nature of microfinance, this section presents other equally valid conception of the ‘art’ or ‘science’ of banking and lending very little sums of money to a historically financially excluded population‐‐ in large part due to their real or perceived high‐risk profile, lack of a track record, or on the basis of not having the kinds of assets that traditional financial intermediaries always considered to be good security for the risks involved. Therefore, in this document the term microfinance is also a general reference to the unique set of technologies that actually makes it possible for any financial services company to conveniently and affordably deliver any self‐sustaining products and services to the world’s most vulnerable populations in both social and economic terms60 . Alternatively, the term also refers collectively to the group of self‐sustaining financial services designed and targeted at the socially and economically disadvantaged populations who are traditionally excluded by conventional financial institutions. Similarly, Amadou Sy (2006)61 also describes microfinance system thus:
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Copyright ©2008 The African Union Commission 47 “… Microfinance is a more formalized system of mobilizing small savings and transforming these into a wide range of services… microfinance is a term that [embraces a set of social and financial devices designed to overcome institutional rigidities of formal financial institutions and to compensate for limitations of the target market segment, i.e., the poor people who have no regular incomes/most vulnerable to shocks…” What sets microfinance apart from conventional financial systems is its high degree of flexibility62 and frighteningly simple‐if somewhat unorthodox, approach to credit risk analysis and management, but while at the same time serving a customer class that typically lacks
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