African Union Policy Validation Workshop

African Microfinance Policy African Microfinance Policy ConvergenceConvergenceThis policy paper demonstrates the capabilities of Microfinance as a potential source of balanced economic growth for Africa, as well as a source of investment opportunity that could lead to poverty reduction. These slides are designed to show exactly how microfinance is rapidly changing and offering hope for uplifting millions of Africa’s vulnerable and low-income population from poverty, especially the principles, strategies, and action that if taken could make it possible to change lives.

Importance of MicrofinanceImportance of Microfinance Less than 4% of African population

have access to finance Only through Microfinance is it possible

for the poor and low income households to save, invest and cope with various shocks.

Until recently it was not possible for the poor and low income households to safeguard their families against death, disability, or other risks e.g. theft, fire but this is now possible through microinsurance

Cont.../1Cont.../1 Low and irregular incomes has for years

prevented the poor and low income families from accumulating useful assets, thereby perpetuating vulnerability.

However, thanks to Microfinance, it is now possible for this group to accumulate valuable assets e.g. through micro leasing,

Inventory credit makes it possible for farmers to get optimum value for their output by reducing their vulnerability

Cont…/2Cont…/2

Microfinance enables poor and low income farmers to take advantage of their grit and ingenuity to increase their output to a higher level of production for example, by adopting new seed varieties and modern techniques

Through microfinance the poor and low income population can be able to provide the best education for their children on the basis of their future income

Cont…/3Cont…/3 Microfinance is going to help Africa

expand its private sector by boosting the level of confidence and productivity of the micro and small scale entrepreneurs, and by providing the capital needed for growth e.g. through SME loans

Where access to Microfinance is wide scale and well sustained, e.g. in Bangladesh, there is evidence that it can lift many families out of poverty, and even readdress entrenched gender biases

Does Africa have a well Does Africa have a well established Microfinance established Microfinance systemsystemModern Microfinance is well rooted in the region, but it is at different stages of development in different countries e.g. in some countries it is just germinating (Sierra Leone, Liberia, DRC, etc), while in others it is just about to blossom (Senegal, Nigeria, Cameroon, etc).

In others (South Africa, Botswana, Eritrea, Zambia) it is difficult to tell what is going on, yet in others (Benin, Uganda etc) there seems to be some reversals despite recent positive developments.

Stage and Level of Stage and Level of Development across the Development across the RegionRegion Countries where the system is at advanced

stages of development (as judged by): Institutional diversity Scale of outreach No. of providers that are institutionally and

financially self sustainable Product base Closeness or distance to international bets

practices and benchmarks Affordability of services Competitiveness

Cont…/1Cont…/1 Countries where the system is at advanced

stages of development (as judged by): Degree of integration of microfinance into

the overall financial system of the country Integration of microfinance in overall

national macroeconomic policy framework Level of cooperation and coordination

among providers and the government Quantity and quality of resources dedicated

to Microfinance development Talent and human resource base Speed and direction of growth

Does the system advance the Does the system advance the interests of the countryinterests of the countryIn countries where the system is well advanced, it directly facilitates the achievement of a nation’s and peoples’ aspirations

Country groupings…Country groupings…5 Scenarios Different levels of

development

Advanced Stage

Intermediate Stage

Take-off Stage

Nascent Stage

Limbo

What is the scale of Africa’s What is the scale of Africa’s Microfinance SystemMicrofinance System4 Scenarios

Sub Region

No. of Countries

Current Pop.

(Millions)

Mean Poverty

Rate

No. of Retail

Banks

No. of MFIs

Pop. W/h Bank

Account (mean %)

Pop. W/h MFIs

(mean %)

Loan Clients (000’s) 

Active Loan Portfolio

(USD, Millions) 

                   

Northern Arica

6 161.8 20.4 120 357 25.0 4.9 3113.8 539.3

West Africa

15 275.8 61.5 172 3946 12.4 3.8 9270.5 1,132.1

Central Africa

9 110.8 522.3 46 1164 76.3 13.6 1043.3 348.2

East Africa

13 278.0 46.2 145 1932 7.4 3.2 8947.4 2,013.7

Southern Africa

10 130.28 56.4 122 3249 16.8 3.3 6650.3 5,863.8

Sum/Avg. 53 955.3 56.8 587 10,648 12.7 3.4 27225

9,897

Industry’s SWOT AnalysisIndustry’s SWOT AnalysisSTRENGTHS

So far, 23 countries have created a conducive enabling

environment for microfinance and another 31 have enacted

regulation for microfinance

There is high demand for savings facilities and micro credit

Microfinance is a virgin market: just about 4 percent of the

market has been captured

MFIs have found the secret to deliver a wide range of

financial services to the poor and low-income groups on

sustainable terms.

Rapid accumulation of best practice knowledge, which is

readily available through the internet

WEAKNESSES

Most MFIs are not liquid enough to meet demand

High operational costs

Huge losses; few MFIs are financially self-sustaining

High client dropouts

Low penetration rates in most of the countries, especially

limited outreach to rural areas. In 2005, for instance, the

Nigerian microfinance sector held just 0.9 percent of total

credit to the private sector and 0.2 percent of the GDP.

Inadequate staffing/ training

Interest rate ceiling in several countries hinder outreach

Low capital base

Absence of support institutions

Up to 24 percent of the MFIs are dependent on donor support

Lack of adequate capacity to supervise and regulate MFIs’

operations

High concentration of the market and not enough competition

that could encourage efficiency and innovation

Low population density in most parts of Africa

Poor roads and lack of adequate infrastructure

Cont…/Cont…/OPPORTUNITIES

Microfinance is taking shape as an asset class for investors, so raising capital in future would be easier

Improved macro-economic environment, e.g., steady and moderate growth averaging 5 percent in the last 5 years, stable and single digit inflation, and greater awareness and better appreciation of the role of microfinance among African governments

The market is hardly satisfied

There is increasing linkages between mainstream financial

institutions and MFIs

New information technology that can help drive down costs

and enable greater outreach

There is room for new institutions that can focus on different

market niches that are hardly touched yet, i.e., focus on the

poorest of the poor, agriculture, and slightly bigger small-

scale enterprises, which are currently not being served by

MFIs

There are huge opportunities to introduce or offer new

products and services

There is plenty of investment opportunities for private sector

There is space for new institutions with quick appraisal and

disbursement to prosper

THREATS

Client dropouts is too high

Many MFIs lack strong management and leadership

Minimum capital requirements are too high

There is likely to emerge competition from banks as the

sector proves to be profitable

Consumer backlash due to high interest rates

Rapid growth without commensurate investment in people

and management system can result into declining portfolio

quality and high loan losses

Strategies and action planStrategies and action plan

1) How to expand outreach to low-income populations with basic savings, payments, insurance, and credit services through improved efficiency, more innovative use of existing networks, the establishment of more service providers, and development of a more inclusive financial system.

2) Building a well-coordinated and diversified microfinance sector in which strong and healthy financial institutions can thrive. (Institutions are systems that have an explicit goal of generating meaning in the society in which they exist. In the case of microfinance in the 53 African states, this consists in enabling the low-income populations to also have access to suitable and affordable financial services, in the first instance. Secondly, they should enable the economy of member states to mobilize vast but untapped savings and transform these into investment and production).

Cont…/1Cont…/13) Improving the performance of microfinance institutions

and enhancing their capacity to deliver appropriate financial services to low-income populations through increased capacity building, promotion of good practices, development of better management systems, increased training of the work force and management, and the development of infrastructure.

4) How to improve the quality of microfinance services and impact and, particularly, enhance the empowerment of marginalized groups through increased competition, consumer education and awareness, and improved transparency.

5) Creating a dynamic and stable macroeconomic environment for micro- and small-scale enterprises to flourish and become more competitive regionally and globally through the provision of microfinance, thereby supporting more investment and trade.

Cont…/2Cont…/26) Enacting suitable laws, regulation, and operational

standards as well as systems of accountability, audit, reporting, and supervision to encourage and facilitate the emergence and growth of a strong, dynamic, and profitable microfinance sector by engendering greater transparency and confidence in the system.

7) How to increase public awareness and knowledge of the microfinance industry, thereby creating interest and attracting more investors by conducting continuous research of the sector, innovation, and dissemination of information.

8) How to establish strong, well managed, and respected industry support organizations, for example, practitioner member networks capable of enforcing discipline among members and leading in the development of basic industry standards and benchmarks, rating agencies, credit registries, and specialized audit services.

Cont…/3Cont…/3

9) How to increase the availability of and lower the cost of investment capital for microfinance development through improvements to the domestic capital markets, establishment of wholesale funds, guarantee schemes, and the publication and diffusion of valuable sector information.

10)Encourage and increase more linkages between banks and various categories of microfinance institutions that serve different segments of the market through suitable public policy, incentives, and regulations.

11)Promotion of effective and healthy public sector participation in the development of microfinance through investment in the building of strong industry infrastructure and development of customized national and regional microfinance policies and strategies.

Cont…/4Cont…/4

12)How to encourage increased national and, especially, regional cooperation among AU member states in furthering the development of microfinance in Africa in addition to encouraging and supporting regional trade and investment.

13)Promoting and introducing consumer education and protection through increased public and/or consumer awareness about financial products and the enforcement of suitable consumer rights, microfinance charters, and obligations.

14)Reducing the long-term cost of financial services to low-income populations, especially small enterprises, through improved competition and access to capital, enforcement of suitable service charters, better market regulation and supervision, and increased consumer education.