BIFSA

1
Micro-Credit Financing and Poverty Alleviation in
OIC Challenges Facing the Microfinance Sector in
Developing Countries
2
Contents

• Definition and key principles
• Situation in Africa
• Key Constraints and Challenges
• Key Opportunities
• Key interventions of UNCDF in Building Inclusive
  Financial Sector

3
DEFINITION

• 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)

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Key principles by CGAP

• 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

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Key principles by CGAP (contnd)

• 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

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Key principles by CGAP (contnd)

• The role of government is to enable financial
  services not to provide them directly
• 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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Situation in Africa

• More than 50 of Africans (approximately 300
  million people) live in extreme poverty.
• Only 4 of the total population in Africa has a
  bank account.
• Number of bank deposits per person in Africa is
  far below other regions.

Number of Deposits per 1,000 population
Madagascar
Venezuela
Thailand
Greece
Austria
Source Demirguc-Kunt, Asli, World Bank, 2005.
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Situation in Africa
Continued

• Only 1 of Africans have a loan or credit
  facility with a formal financing institution.
• Number of loans per person in Africa is far below
  other regions.

Number of Loans per 1,000 population
Madagascar
Venezuela
Panama
Greece
Austria
Source Demirguc-Kunt, Asli, World Bank, 2005.
9
Situation in Africa
Continued

• Minimum deposits and fees required to open
  checking accounts in Africa, in relation to GDP
  per capita, are significantly higher than other
  regions.

Minimum Amount to Open Checking Accounts (of GDP
per capita)
Uganda
Malawi
Ghana
Bolivia
Bulgaria
Source Demirguc-Kunt, Asli, World Bank, 2005.
10
Situation in Africa
Continued

• Starting a business in Africa is far more
  expensive and takes longer than in most other
  regions.

Starting a business regional comparison
Region or economy Procedures(number) Duration (days) Cost ( of GN per capita)
East Asia Pacific 8.2 52.6 42.9
Europe Central Asia 9.6 36.4 13.5
Latin Amer Caribbean 11.4 63.0 56.2
Middle East North Africa 10.1 45.4 64.2
OECD High income 6.5 19.5 6.8
South Asia 7.9 35.3 40.5
Sub-Saharan Africa 11.0 63.8 215.3
Source Doing Business Benchmarking Business
Regulations. World Bank/ IFC 2005
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Situation in Africa
Continued

• Registering property is considerably more
  expensive than in other regions.

Cost to register property ( of average value of
property to be registered)
Source Doing Business Benchmarking Business
Regulations. World Bank/ IFC 2005
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Situation in Africa
Continued

• Enforcing contracts in sub-Saharan Africa is
  difficult and expensive.
• Micro and small enterprises in Africa generally
  lack access to credit or any type of financial
  services.
• Women and the poorest people often have no access
  to financial services in Africa, particularly in
  rural areas.

Contract enforcement in regional comparison
Region or economy Procedures(number) Duration (days) Cost ( of debt)
East Asia Pacific 30.0 406.8 61.7
Europe Central Asia 29.6 393.0 17.4
Latin Amer Caribbean 35.5 461.3 23.3
Middle East North Africa 39.5 432.1 17.7
OECD High income 19.5 225.7 10.6
South Asia 29.7 385.5 36.7
Sub-Saharan Africa 35.9 438.5 41.6
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Situation in Africa
Continued

• Financial sectors in most African countries are
  under-capitalized, underdeveloped, and in need
  of restructuring.1
• African financial sector depth (M2/GDP) is
  limited
• Financial sector depth measures the liquidity of
  an economy.
• Average depth in Africa was 32 between 1995 and
  2000.2
• But individual LDCs have far less depth e.g.
  DRC 7 Guinea 10

1. Office of Finance, US Department of Commerce,
International Trade Administration. 2.
Christensen, Jakob, Domestic Debt Markets in
sub-Saharan Africa (IMF Staff Papers, Vol 52, No
3) Washington, D.C. 2005. 3. CGAP, UNCDF
studies.
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Situation in Africa
Continued

• Informal sector remains dominant in much of
  sub-Saharan Africa, although MFIs are growing.3
• Financial services infrastructure in Africa lags
  progress in other parts of the developed world.
• Policy, Regulatory and Supervisory Frameworks
  need considerable strengthening in many African
  countries.

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Situation in Africa

• Access to domestic and international capital
  markets for governments and financial service
  providers is very limited.
• 17 of the bottom 20 countries on the Capital
  Access Index are in Africa.

Average of Sub-components for 2005 Capital Access
Index by Region
2005 CAI Macro-Economic Environment (ME) Economic Institutions (IE) Financial and Banking Institutions (FI) Equity Market (EM) Bond Market (BM) Alternative Capital (AC) Intl Access (IA)
Industrialized Countries 7.02 7.23 7.11 7.02 6.76 6.23 5.48
Africa 3.12 4.85 4.22 3.11 1.31 0.18 0.75 3.15
Americas and Caribbean 4.22 5.68 4.79 4.06 2.51 1.97 3.12 4.34
Asia 4.87 6.12 5.41 5.00 4.28 2.90 3.21 4.51
Europe 4.57 6.61 5.01 4.90 2.63 1.95 2.66 4.48
Middle East 4.61 7.18 5.03 4.65 3.67 1.23 2.06 3.94
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Key Constraints and Challenges

• 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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Key Constraints and Challenges
Continued

• Diversity of political situations and Governance
  quality impacting the economic and social
  situation and the MFIs
• Legal situation and difficulty to enforce the
  laws
• Infrastructure, communication and technology
  problems increase the transaction costs both for
  borrowers and lenders
• Macro economic instability (high inflation)
• Not a common shared vision on the sector
  development
• Wide country (DRC) low density of population
  (Mauritania, Niger)

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Key Constraints and Challenges
Continued

• 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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Key Constraints and Challenges
Continued

• Lack of common Vision
• Leadership, governance and management problems
  mainly in the C.U. (relationships between the
  techniciansand 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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Key Constraints and Challenges
Continued

• 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).
• 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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Key Constraints and Challenges
Continued

• 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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Key Opportunities

• 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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Key Opportunities

• 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)
• 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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Key Opportunities

• 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)
• 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,
• Lot of funds available for Africa (gt200 millions
  USD)
• Regional initiatives to rationalize use and
  chanel of funds.

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Key Opportunities

• 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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Key interventions of UNCDF in Building Inclusive
Finance

• Identify 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
• Support development of national policies,
  strategies and action plans based on sector
  assessment
• Help build a shared vision on shaping a
  competitive, efficient, and inclusive financial
  sector
• Assist set up of appropriate frameworks for donor
  coordination and cooperation (trust funds,
  investment committee, etc.)
• Increase focus 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 eligible to microfinance
• Donors should set up appropriate frameworks to
  increase coordination at national and regional
  level
• Government should pull out from direct
  intervention and rather support national dialogue
  and shared vision to promote an Inclusive
  Financial Sector that work for the country and
  the poor majority