Post on 24-May-2015
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.