Which Way for African MFIs?
In its bid to develop microfinance within the broader context of continental economic growth and poverty alleviation efforts, the African Union commissioned a workshop in Dakar, Senegal in 2008. The meeting was attended by 27 experts in the field of microfinance, regulatory agencies and staff of the AU Commission.
The workshop hosted by the African Institute for Economic Development and Planning (IDEP) defined Microfinance as “ 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.” The workshop further observed that “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.”
The Consultant, Mr. Henry Oloo Oketch, presented a report on the study on the elaboration of a roadmap/action plan for the development of microfinance in Africa. On the state of microfinance in Africa, he observed the following:
The State of Microfinance in Africa
He observed that less than 4 percent of African population has access to microfinance and only 1 per cent has access to commercial finance. Microfinance services have benefited 26 million Africans. Through MFI’s, the poor and low income households can now save, invest and insure to cope with various types of shocks. In addition, MFIs have contributed significantly to education, nutrition, health and negative effects of death.
Assessing how well established Africa’s microfinance system is, the consultant stated that the microfinance system is at different development stages in different countries namely: take-off, growth, maturity and decline.
Evaluating the level of development of the sector in different parts of the continent, he focused on the institutional diversity that includes cooperatives, MFIs, NGOs, and commercial banks; scale of outreach evidenced by a large number of borrowers, savers and a wide branch network and number of providers that are institutionally and financially self-sustaining through good leadership and effective information system.
The consultant also examined the 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 as well as closeness or distance from international best practices as evidenced by cost of lending, return on investments and customer satisfaction, among others.
Other areas of focus included: Affordability of Service; competitiveness; degree of integration of MFIs into the overall financial system of the country; degree of integration of MFIs into the overall macroeconomic policy framework; level of co-operation and co-ordination among stakeholders; quantity and quality of resources dedicated to microfinance; pool of talent and human resource base; and speed and direction of growth of the sector.
Participants observed that the objective of microfinance is to help in poverty alleviation efforts. However, high interest rates are causing opposite results in some countries. They also noted that as banks downscale, they poach staff from MFI’s thus weakening the institutions. The participants further noted that subsidies from governments hinder development of MFI’s as this promotes dependency and non payment cultures. Even though microfinance can contribute significantly to economic growth and development, they observed, it is not a panacea for all of Africa’s problems and should not be discussed in isolation, but in relation to other challenges such as land reform, access to national resources and ownership issues.
They asked the AU to facilitate the documentation of transformation of NGOs into commercial entities in Africa to provide reference and expressed the need to give special attention to the poor, gender and the people excluded from the system; as well as clarify the terms “capitalization” to include financial and technical.
Within the context of the crosscutting nature of gender issues, it was recommended that gender discriminatory practices in MFI policies be eliminated; MFI policies be home grown, and involve all stakeholders, including women; the proliferation of MFI products traditional banking sector comply with microfinance characteristics and components; and the expansion of current 4 percent coverage in financial services and 1 percent in credit services be scaled up to respond to the urgent need to enhance the micro and SME sector to formal private sector enterprises.
Recommendations to African Governments
The meeting recommended that governments need to be part and parcel of microfinance development, especially in providing a conducive environment for microfinance to prosper. 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.
Governments were further asked to provide and/or motivate MFIs and other financial service providers to extend outreach to the rural areas whose populations are greatly disadvantaged because of high delivery costs due to inadequate infrastructure. In drafting microfinance policies and regulations, governments were asked to consult 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.
Governments were further asked to create/support training institutions that run specialized microfinance courses to address capacity constraints in the microfinance sector; conduct gender disaggregated assessment of the resources required to reach the sections of the population that are not currently served by MFIs; encourage local investors to participate in the microfinance sector while pursuing liberalization policies and work on an enabling environment for Microfinance.
Finally, African governments were asked to support MFIs by funding capacity building initiatives and research; and ensure that the central bank regulation officers have the necessary capacity to supervise the microfinance sector.
Recommendations to African MFIs
Noting that African MFIs can do better in various factors despite the shortage of funds; it was recommended that MFIs put more emphasis on training and capacity building staff in order to improve productivity, improve professionalism and quality of portfolios; run along business lines in order to reduce their dependency syndrome and that MFIs 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;
MFIs were called upon to explore potential use of ICT to improve scale of outreach; go into partnership with other relevant institutions; offer products at reasonable price for the customers and be innovative in products and service delivery.
Recommendations to African country networks
It was agreed that country MF networks should play a critical role. While some networks are active and vibrant, some are dormant. Country networks were asked to play a more feasible coordinating and facilitating role bringing stakeholders together in all issues that affect the development of microfinance in the specific countries; sensitize and expose auditors to unique features of microfinance to enable them effectively audit microfinance institutions; focus on capacity and institutional building of African MFIs; promote exchange among African MFIs and ensure that they are covering all African regions.
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 recommended that the AU should facilitate the elaboration of an African Microfinance Charter and an implementation mechanism; the creation of a code of conduct for microfinance in Africa and integrate the microfinance policies of the RECs in line with other integration programmes manifested on the continent.
They also asked the AU to lobby Member States to integrate microfinance into the financial sector and promote the establishment a diversified, viable and perennial microfinance sector as an integral component of the national financial system. In addition, the AU should encourage Member States to promote Public-Private partnership (PPPs) especially in the area of infrastructure development and institutionalize an annual African Microfinance Forum.
The African Union was further asked to make it possible to generate internal financial resources (in Africa e.g. AfDB); add a page on microfinance on their website; provide support for training and research centres in Africa in the main languages; support MFIs in exploring alternative ways of raising capital e.g. savings mobilization, better use of Diaspora remittances and develop strategies for the development of sustainable microfinance in conflict and post-conflict countries.
Other key recommendations to the African body included: providing funding for MFIs to do research and support documentation of impact of microfinance on development; support translation of training material in major languages; support ICT use by MFIs through funding and linkages to donors and set up Innovation grants to encourage MFIs to innovate in microfinance (products, services, use of technology etc.).
Finally, the AU was asked to set priorities by region/sub region; promote exchange, internship and volunteer programmes among MFIs; support the coordination of regional networks; and assist in the development of benchmarks, standards and ratings.