Microfinance as a Strategy for Poverty Reduction in Africa

1
Microfinance as a Strategy for Poverty Reduction
in Africa

• Fodé NDIAYE,
• UNCDF Microfinance Regional Unit for Southern
  and Eastern Africa,
• Regional Technical Manager
• Fode.ndiaye_at_undp.org
• Expert Group Meeting on Poverty Eradication
• Bangkok, 6 7 July, 2005

2
Content

• Microfinance Concept and trends
• Poverty
• Microfinance achievements
• Microfinance and Poverty Reduction Challenges
• Microfinance and Poverty Reduction Opportunities
• Microfinance and Poverty Reduction Building
  Inclusive Financial Sectors
• Conclusion

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Microfinance Concept and trends (1)

• Microfinance provision of diverse services
  (credit, savings, microinsurance, remittances,
  leasing) to lower income and poor people
  (level of poverty will vary from one country to
  another) by diverse professional financial
  intermediaries (NGOs, Banks, NBFI, Credit Unions)

4
Microfinance Concept and trends (2)

• Key principles developed and endorsed by CGAP and
  further endorsed by the G8 Summit (June, 2004
• Poor people need a variety of financial services
  not just loans
• Microfinance is a powerful tool to fight poverty
• Microfinance means building financial systems
  that serve the poor
• Microfinance can pay for itself, and must do so
  if it is to reach very large numbers of poor
  people

5
Microfinance Concept and trends (3)

• Microfinance is about building permanent local
  financial institutions
• Microcredit is not always the answer. Microcredit
  is not the best tool for everyone or every
  situation
• Interest rate ceilings hurt poor people by making
  it harder for them to get credit
• The role of government is to enable financial
  services not to provide them directly

6
Microfinance Concept and trends (4)

• Donor funds complete private capital not compete
  with it
• The key bottleneck is the shortage of strong
  institutions and managers
• Microfinance works best when it measures and
  discloses its performance.

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Microfinance Concept and trends (5)
Outreach Active Portfolio of Microfinance
Institutions and Units
Integration
Start-up
Emerging Expanding
Consolidation
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Poverty (1)

• Multidimensional and complex status
• Poverty is related to no access or insufficient
  access to
• Economic and financial means of production and
  property rights
• Services health, education, water
• Power and equal rights social, political,
  gender issues
• Adequate and sustainable environment

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Poverty in Africa (2)

• Poverty Poverty line in each country
• Less than 1 USD per day
• Africa lags behind for social progress
• 67.3 of the LDCs
• 6 of the poor people have access to financial
  services (with diverse situations)
• 50 of the population live with 1 US or less per
  day
• Gender oriented poverty
• Rural Poverty
• HIV / AIDS and its effects

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Microfinance Achievements in Africa (1)

• Significant number of MFIs but most of them with
  low level of sustainability 900 report to the
  Microcredit Summit
• 164 MFIs the most important report to the
  Microbanking Bulletin
• 500 MFIs belong to various network of AFMIN with
  10 million members

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Microfinance Achievements in Africa (2)

• WAEMU Microfinance Evolution 1993 - 2003
• Institutions 600, six times
• 2,597 service points (i.e. 1 service point for
  1,354 sq. km or for 28,302 inhabitants)
• Members 4 million, 11.8 times with 43 of women
  (32,6 households with an average of 6
  inhabitants / household or 5,44 of the
  population)
• Savings 375.6 million USD, 10 times
• Credit Outstanding balance  372.7 million USD,
• Average loan size 126.6 USD
• Average savings balance 495 USD.

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Microfinance Achievements in Africa (3)

• Financed sectors 
• small trade and restaurants  54 
• agriculture and animal husbandry  20
• Handicraft  16
• Transports  6
• Housing  4.

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Microfinance Achievements in Africa (4)

• State of the sector varies from one country to
  another
• Political, economical environment
• Legal and regulatory framework
• Outreach and sustainability of the sector
• Importance of informal sector
• Despite some important development during the
  last 10 years, and some leading successful MFIs
  (Benin, Senegal, Kenya, Uganda..), many African
  Microfinance industries are still at a Start up
  to expansion phase

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Microfinance Achievements in Africa (5)

• Many policies or strategies to promote the Micro
  and SMEs development positively impacting the
  market
• Reforms of the financial sectors
• National Policy and Strategy (Tanzania, Uganda,
  Benin, Togo, Niger, Mali, Senegal (ongoing))
• Designing, adjusting and implementing conducive
  legal and regulatory framework
• Tanzania, Uganda, Ghana, South Africa
• WAEMU CEMAC Ethiopia, Madagascar, DRC
• More involvement of the Central banks and the
  Ministries of finance
• Development of MFIs Networks at national, sub
  regional and regional levels (AFMIN, MFN, MAIN,
  SAMCAF)

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Microfinance Achievements (6)

• Studies in Some African Countries
• Group lending methodologies in rural areas deal
  more with the poor
• Effects on households living conditions more
  directly linked to women clients
• Improvement of revenues and activities of micro
  entrepreneurs (PADME IKM)
• Improvement of the revenues (IKM Morocco)
• Assets building in Guinea

16
Microfinance Achievements (7)

• MicroSave StudiesAccess to improved financial
  services access to more and better ways of
  turning savings into lump sums helps poor
  people from sliding deeper into poverty and helps
  them lay foundations for their ambitions to
  better themselves and their families.
• Self confidence and esteem
• Local resource mobilisation
• Access to capital more affordable than
  Moneylenders.

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Microfinance Achievements (8)

• Investment in childrens education (Zambuko in
  Zimbabwe, Barnes)
• Womens business (Cameroon)
• Health (Ghana)
• Senegal (BCEAO, CGAP)

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Microfinance Achievements (9)

• Three major camps (Hulme)
• very beneficial economic and social impacts
  (Holcombe, 1995 Hossain, 1988 Otero and Rhyne,
  1994 Remenyi, 1991 Schuler, Hashemi and Riley,
  1997).
• caution against such optimism and point to the
  negative impacts that microfinance can have
  (Adams and von Pischke, 1992 Buckley, 1997
  Montgomery, 1996 Rogaly, 1996 Wood and Shariff,
  1997).
• In the middle is work that identifies
  beneficial impacts but argues that microfinance
  does not assist the poorest, as is so often
  claimed (Hulme and Mosley, 1996 Mosley and
  Hulme, 1998).

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Microfinance and poverty alleviation (1)

• Direct effects
• Microfinance and income generating activities and
  entrepreneurship development
• Self employment
• Building assets
• Mitigating risks (savings and microinsurance)
• Training (management and governance of
  institutions)

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Microfinance and Poverty Alleviation (2)

• Indirect effects
• Local economic development
• service delivery
• income and salaries
• market and service provision.
• Women empowerment and social dimensions
• Improvement in living conditions

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Microfinance A strategy for poverty Reduction
Constraints (1)

• The review of different sector evaluations and
  Microfinance National Strategies in Mali, Niger,
  Benin, Togo, Madagascar, Democratic Republic of
  Congo, Malawi, Sierra Leone, particularly shows,
  but with differences related to the development
  stage of the given sector, that the constraints
  concern three major axes
• environment, particularly with the legal and
  regulatory framework
• financial intermediaries
• borrowers.

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Microfinance A strategy for poverty Reduction
Constraints (2)

• Diversity of political situations and Governance
  quality impacting the economic and social
  situation and the MFIs
• Togo political problems
• DRC still in transition with instable peace
  agreement
• Liberia and Sierra Leone post conflict countries
• Legal situation and difficulty to enforce the
  laws

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Microfinance A strategy for poverty Reduction
Constraints (3)

• Infrastructure, communication and technology
  problems increase the transaction costs both for
  borrowers and lenders
• Macro economic instability (high inflation in
  DRC)
• Not a common shared vision on the sector
  development
• Wide country (DRC) low density of population
  (Mauritania, Niger)

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Microfinance A strategy for poverty Reduction
Constraints (4)

• Legal and regulatory framework
• WAEMU Questions about
• the institutional approach which seems not to
  give to non C.U. a long term vision of their
  development
• the efficiency of the supervision by the Cell
  within the Ministry of finance (roles of
  promotion and roles of supervision, political
  influence on the delivery of the authorization to
  carry out the operations)

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Microfinance A strategy for poverty Reduction
Constraints (5)

• WAEMU
• Linkages between fiscal exemptions and the Law
• Necessity to adjust some ratios (provisioning
  with the international standards, specific ratios
  for the MFIs under convention cadre)

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Microfinance A strategy for poverty Reduction
Constraints (6)

• Loose of confidence due to the collapse of former
  MFIs (DRC, Guinea)
• Concentration in Urban areas
• Rural areas not sufficiently covered
• Agriculture and rural activities important for
  African development
• Disperse populations and remote rural areas
• Transaction costs
• Doubtful debts and loan portfolio quality
• Pricing (interest rate) and profit center
• Business Planning
• HRs capability and motivation

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Microfinance A strategy for poverty Reduction
Constraints (7)

• Vision
• Leadership, governance and management problems
  mainly in the C.U. (relationships between the
   technicians  and  the elected bodies )
• Growth management
• Deficiency in the internal control system and
  procedures
• Management Information System problem
• New products insufficiency in innovative
  products despite some progress

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Microfinance A strategy for poverty Reduction
Constraints (8)

• financial transparency and institutional, social
  and financial viability
• Insufficiencies sometimes accentuated by the
  weakness or the absence of support services to
  the sector, at financial and technical levels
  (training, accounting and audit assistance,
  credit bureaus, appropriate financing
  mechanisms).

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Microfinance A strategy for poverty Reduction
Constraints (9)

• Financial continuum relationships with the banks
  are increasing yet not a right level
• Banks still lack of competency to assess the risk
  related to MFIs for refinancing and to a broader
  range of clientele (direct funding)
• Sustainable Financial services in rural still a
  problem
• Long term resources to sustain mid term loans
• Access to financial resources less an issue if
  strong MFIs to invest in.

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Microfinance A strategy for poverty Reduction
Constraints (10)

• HIV / AIDS and its impact
• Low level of productivity
• High illiteracy rate
• Psychological and social aspects
• Necessity of having trained clientele with
  increasing and credible cost-effective investment
  opportunities, transaction needs, transfer,
  savings

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Microfinance and Poverty Alleviation
Opportunities (1)

• The Millennium Development Goals (MDGs)
• reduce extreme poverty and hunger
• ensure primary education for all
• promote gender equity and women independence
• reduce infant mortality
• improve maternal health
• fight HIV/AIDS, malaria and other diseases
• ensure a viable environment
• increase development global partnership.

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Microfinance and Poverty Alleviation
Opportunities (2)

• CGAP
• Access to financial services underpins the
  ability of the poor to achieve the MDGs on their
  own terms in a sustainable way.
• Financial services enable the poor to increase
  and diversify incomes, build human, social and
  economic assets, and improve their lives in ways
  that reflect the multidimensional aspects of
  poverty.
• Evidence shows that poor people choose to invest
  in a wide range of assets better nutrition,
  improved health, access to schooling, a better
  roof on their homes, and expansion of their small
  businesses.

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Microfinance and Poverty Alleviation
Opportunities (3)

• Microfinance and Development (Otero, ACCION)
• contribution to the fight against poverty by
  facilitating poor and low income households
  access to financial services, microfinance
  creates conditions for sustainable access to
  productive capital and reinforces poor people
  dignity and their capacity to participate in
  economy and community
• the creation of viable and sustainable
  institutions ensures sustainable access to
  financial services by poor people

34
Microfinance and Poverty Alleviation
Opportunities (4)

• microfinance institutions become an integral part
  of the financial system and extend the financial
  sectors capacity to reach the populations
  excluded from banks and other financial systems.
  

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Microfinance and Poverty Alleviation
Opportunities (5)

• Political willingness to support the sector
  (PRSPs, MDGS)
• Development of the informal sector and the MSMEs
  and increasing market for MF
• Increasing interest of a common shared vision for
  a sustainable microfinance sector (donors,
  investors, practitioners, TSPs, Banking systems)

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Microfinance and Poverty Alleviation
Opportunities (6)

• To achieve NEPAD and MDGs, level of annual
  economic growth gt7
• Necessity of sound and inclusive financial
  sector
• The development of MSMEs and informal sector 60
  of the economic activities
• Access to capital is considered as one the
  bottleneck of the MSMEs

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Microfinance and Poverty Alleviation
Opportunities (7)

• Unemployment and informal job is increasing Sub
  African Africa the 2nd fast growing labour
  force in the world
• Increase of income will help strengthen the local
  markets and improve local demand for the economy
• Some MFIs are units for governance and management
  training
• Women majority of the clientele and
  relationships between womens income and
  households living conditions

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Microfinance and Poverty Alleviation
Opportunities (8)

• Microfinance provides financial services to the
  huge market considered as playing key role in
  development and poverty reduction
• Mobilization of local savings and remittances
• Contribution to the integration of the local
  financial markets

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Microfinance and Poverty Alleviation
Opportunities (9)

• New players in the sector (banks, corporate
  finance companies)
• Development and use of tools to design BP and new
  products (MicroSave, CIF, AFCAP) Credit Savings
  and Education, learning from the informal
  sectors, strengthening local initiatives (MMD
  (Niger), FSAs (Benin, Ghana, Kenya)

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Microfinance and Poverty Alleviation
Opportunities (10)

• Innovation to tackle some constraints (mobile
  banking, Smart cards with fingerprint, use of
  photos, networking with banks and postal banks
  for money transfer, Credit bureaus)
• Regional program to support the sector with
  donors (BCEAO, UNCDF/UNDP  Building Inclusive
  financial sectors )

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Microfinance and Poverty Alleviation
Opportunities (11)

• Finding good deals investable MFIs
• Lot of funds available for Africa (gt200 millions
  USD)
• Investors

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Kofi Annan, 23 December 2003,press release on the
International Year of Microcredit

• The great challenge before us is to address the
  constraints that exclude people from full
  participation in the financial sector
• Together, we can and must build inclusive
  financial sectors that help people improve their
  lives.

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Microfinance and Poverty Alleviation Towards
Inclusive Financial sectors (1)
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Microfinance and Poverty Alleviation
Opportunities (12)

• Diverse institutions providing permanent access
  to a wide range of financial services for a
  broad range of poor and low income households
  and MSEs
• sustainable access to financial services to a
  majority of lower income and poor people by the
  integration of microfinance to the mainstream
  financial sector
• Bank downscaling
• MFIs upscaling

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Microfinance and Poverty Alleviation Towards
Inclusive Financial sectors (2)

• 1. Financial Sector Assessment a diagnosis of
  the financial sector
• all aspects relevant for the functioning and
  development of the microfinance sector
• identifies the constraints and untapped
  opportunities that need to be addressed to allow
  for full participation of the lower segments of
  the market into the financial sector

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Microfinance and Poverty Alleviation Towards
Inclusive Financial sectors (3)

• assessment should be discussed and validated by
  all key stakeholders in the financial sector.
• 2. Development of a national policy, strategy and
  action plan based on the assessment
• a shared vision on building a competitive,
  efficient, and inclusive financial sector

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Microfinance and Poverty Alleviation Towards
Inclusive Financial sectors (4)

• The policy, strategy and action plan is designed
  to put this vision into practice
• The policy agreed upon principles and roles of
  the actors
• The strategy A set of Operational Objectives
  following a Defined Policy main areas that will
  be addressed to develop the sector

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Microfinance and Poverty Alleviation Towards
Inclusive Financial sectors (5)

• The action plan will address the identified
  constraints and take advantage of the
  opportunities and defines financing,
  implementation arrangements including impact and
  performance assessment.

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Microfinance and Poverty Alleviation Towards
Inclusive Financial sectors (6)

• 3) the professionalism of the sector
• Strengthening the MFIs capacity
• Strengthening the support services (like funding
  mechanisms, audit and legal services, networks,
  training facilities, credit bureaus, etc.)
• 4) other environmental factors preventing the
  financial services to become a stable, permanent
  and unsubsidized integral part of the formal
  financial system.

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Microfinance and Poverty Alleviation Towards
Inclusive Financial sectors (7)

• Progress reviews to be carried out to assess the
  implementation process and recommend adjustments.
• the opportunity of the Year of Microcredit
• the Blue book.

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Microfinance and Poverty Alleviation Towards
Inclusive Financial sectors (8)

• 3. Implementation of the action plan
• The action plan focuses on developing
• 1) a conducive political, economical environment
• 2) a conducive legal and regulatory framework

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Conclusion

• Microfinance is not a panacea and all poor people
  are not concerned by microfinance
• UNCDF/UNDP has a joint initiative to build
  inclusive financial sectors in Africa UNIFI
  Africa United Nations Initiative for Financial
  Inclusion
• 42.3 Million USD 2004 2010 with the aim to
  mobilize 100 million USD from the private sector.

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Selected Bibliography and Website for the
Presentation

• Year of Microcredit www.yearofmicrocredit.org
• Microfinance, Poverty Reduction and the
  Millennium Development Goals Peter Kooi
  (SUM/UNCDF) (2003)  in UNDP Poverty Reduction 
  The Practice Newsletter Jan 03.
•  Bringing Back Development into Microfinance ,
  Maria OTERO, ACCION, 1999
• Lapproche sectorielle, note conceptuelle, Fodé
  NDIAYE et Makarimi ADECHOUBOU
• Le cadre légal et réglementaire pour la
  microfinance et rôles du FENU Note conceptuelle
  Fodé NDIAYE et Makarimi ADECHOUBOU
• Pourquoi une réglementation spécifique pour la
  microfinance? Fodé NDIAYE, 2004

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Selected Bibliography and Website for the
Presentation

• CGAP website and links www.cgap.org
• Microfinance Bulletin and Mix www.mixmbb.org
  www.mixmarket.org
• BCEAO www.bceao.int
• BEAC Cadre légal et réglementaire
• GTZ Regulatory Framework A Comparison of 11
  Countries Worldwide
• Specific Central Banks sites
• CGAP Guiding principles on Regulation and
  Supervision of Microfinance
• UNCDF Building Inclusive Financial Sectors
  www.uncdf.org

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Selected Bibliography and Website for the
Presentation

• CGAP and UNCDF Microfinance Donor Training
  Handbook
• Small and Microenterprise Finance Guiding
  Principles for Selecting and Supporting
  Intermediaries
• ADME site www.padmebenin.org
• K Rep site www.k-rep.org
• The Worldbank www.theworldbank.org
• IFAD www.ifad.org
• MicroSave www.microsave.org
• Accion www.accion.org

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• Thank you
• QA