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What is the Cutting Edge for Microfinance in Rural Areas and Arid and Semi-Arid Land?

The case of UNCDF intervention in sierra leone

Africa-Middle East Regional Microcredit Summit

April 7-10, 2010 Nairobi, Kenya

Issa Barro

Consultant

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Sierra Leone country context

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Sierra Leone country context

Post-conflict, emerging from a decade of civil war that resulted in the decline in social indicators, putting Sierra Leone at the bottom of UNDP’s Human Development Index.

Destruction of rural finance + Banks that had up-country branches closed them. Nearly all savings and credit cooperative organizations have been rendered non operational.

Most microcredit was being supplied by 50 to 60 microfinance NGOs, projects and programs. Most of these microfinance operations were small and institutionally weak with an outreach of less than 200 clients, and none had achieved sustainability.

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Background of the microfinance sector before intervention Estimated unmet demand of microfinance services

between 76,000 and 145,000 customers and a financing gap of US$ 20 to 40 million.

This gap to be overcome only by building robust and professional institutions or bank units that are specialized in providing sustainable financial services to the lower segments of the market.

It was then suggested that there was a need for an integrated, sector-wide approach to achieve significant, long term results.

Measures should be taken to ensure optimal coordination among stakeholders in order to effectively advance the vision and strategy presented in the Government’s microfinance policy.

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UNCDF Conceptual Approach

UNCDF supports the Building of Inclusive Financial Sectors, both through investments in emerging microfinance institutions and through the UNCDF Sector Development Approach to Inclusive Finance:

1.1 Gather data on access to financial services to establisha Baseline and measure results.1.2 Evaluate legal, regulatory and policy framework, andfinancial services infrastructure requirements.1.3 Evaluate human and institutional capacity and constraints. 1.4 Formulate programdocument that summarizes the process, identifies key constraints to inclusive finance and provides initial basis for steps 2 and 3.

1. Financial Sector Assessment

4.1 Address policy issues identified in National Strategyand Action Plan.

4.2 Establish Investment Fund and Investment Committee.

4.3 Scale up investments in Financial service providersand infrastructure.

4.4 Gather data on access, quality and quantity of financial services providers, financial service providersustainability and investment results.

4. Implement National Action Plan

2. Pilot Initial Activities

3. Develop Nationally Owned Policy, Strategy & Action Plan

2.1 Train key policy makers on issues related to inclusive finance.2.2 Research legal options for Fund for Inclusive Finance and establishInvestment Committee. 2.3 Identify and pilot investment mechanism, solicit initial proposals and hold Investment Committee.

3.1 Develop supportive legal, regulatory & policy environments,3.2 Strengthen capacity of financial service providers to provide products and services to all market segments.

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UNCDF Inclusive Finance sector development approachStep 1. Sector Assessment: Diagnosis of the

financial sector with a view to identifying gaps, constraints and opportunities to be addressed

Step 2. Nationally owned vision and strategy: Design and adoption of a National Strategy for Financial Inclusion (NSFI) grounded by microfinance best practices, along with an action plan and budget in a concerted process

Step 3. Implementation key principles: 1) Disciplined management; 2) Transparency; 3) Reporting and accountability; 4) Pricing, with MFIs free to set prices reflecting market conditions and their internal costs; 5) Delinquency control; 6) Appropriate techniques and products; 7) Gender consideration; 8) Governance, and free from government and political interference

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Results achieved- Building partnerships & mobilizing resourcesThe project has performed admirably in this regard, mobilizing at least an additional US$12.5 million in MFI financing since its inception

- Creating an enabling environmentMicrofinance is seen as an integral part of the financial sector. Clear guidelines for both credit-only and deposit-taking MFIs have been issued

- Creating a microfinance sector in SL2004: only a handful of relief and development agencies providing credit but there was no real microfinance sector;2009: more than 20 institutions offering financial services to the poor and underserved, and adhering to recognized good practice

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Results achieved- Outreach 2004 2009

Number of active clients 13,000 123,960

MFIs have achieved very broad geographic coverage, including the difficult-to-access rural areas:Lumley, Wellington, Kambia, Lungi, Bo, Kono, Kenema and Kailahun, Waterloo in the Western Area, Lunsar and Port Loko town in Port Loko; Daru and Segbwema in Kailahun; Bamoi and Rokuprr in Kambia and Blama in Kenema, Makeni, Moyamba, Pujehun, Kissy, Pademba Road 1, Pademba Road 2, Mile 91, Tonkilili, Segbwema, Kailahun, Mattru, Bonthe, Kabala, Koinadugu and Zimmi.

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- Loan portfolio outstanding 2004 2009 US$ 1 million

US$ 11.5 million

- Portfolio quality (PAR30) 2004 200915.45% 7.82%

- Profitability (OSS) 2004 2009 70.33%

103.30%

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Results achieved

The following graphs show the exceptionally high rate of growth in clients and portfolios since project inception, with active loan clients increasing by 350% in the five-year period, and the loan portfolio by more than 650%

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Results achieved

• Graph 1: Growth in Active Loan Clients

Active Loan Clients

-10,00020,00030,00040,00050,00060,00070,00080,00090,000100,000

Date

Act

ive

loan

clie

nts

Series1

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Results achieved

• Graph 2: Growth in Outstanding Loan Portfolio

Outstanding Loan Porfolio

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2,000,000.00

4,000,000.00

6,000,000.00

8,000,000.00

10,000,000.00

12,000,000.00

14,000,000.00

16,000,000.00

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Date

Out

stan

ding

Loa

n P

ortfo

liio

Series1

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Results achieved

• Graph 3: Growth in Active Savings Clients

Active Savings Clients

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5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Date

Act

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savi

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Series1

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Results achieved

- Attracting Market LeadersUnder the MicroLead program (US$20M), one of the world market leader in microfinance, BRAC Bengla Desh, started activities in SL, with a target outreach of 80,000 clients by end of 2013

- Attracting private investorsOne of the best performing MFI that the project helped implement and develop, Finance Salone, has attracted private investors and was purchased by a local commercial bank and a private investment fund for US$1M.

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Lessons learned and success factors This case demonstrates that if government and donors

combine their efforts, it is feasible that within a period of 5 to 7 years, a poor, post-conflict country could move from the start-up to the consolidation phase of building an inclusive financial sector and achieve tremendous results in terms of outreach, impact, sustainability, etc.

• A good sector assessment is key

• Government should demonstrate its commitment, but not beyond its role creating an enabling environment and economic opportunities

• Agreement on the principle and implementation of best practices is key to sound and sustainable sector development.

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Thank you