1.Copyright2008TheAfricanUnionCommission1Advancing the AfricanMicrofinance SectorTheroadmapandplanofaction1Released 31DECEMBER2008TheAfricanUnionCommissionAddisAbaba,Ethiopia1TheassignmentwascarriedoutbyHenryOKETCHofTMMaarifaConsultantsLtd.inclosecollaborationwiththeAfricanUnionStaffattheDepartmentofEconomicandSocialAffairs.TheFrenchVersionofthisdocumentwastranslatedbyelHadjiNIASSE,alsoinclosecollaborationwiththeDepartmentofEconomicandSocialAffairs.

2. Copyright2008TheAfricanUnionCommission2CONTENTSI.INTRODUCTION51.1JustificationandBackground51.2Scopeandfocusofstudy71.3TheAfricanPoliticalEconomyandPhilosophyofMicrofinance81.4SomeTheoreticalaswellasEmpiricalAspectsofMicrofinance14II.PROCESSANDMETHODOLOGY442.1Purpose442.2DefinitionsofKeyTerms462.2Arrangementandorganization512.3ProcessandMethodology51Table5CountryNetworksSurveyedforPrimaryData53III.TheStateofMicrofinanceinAfrica553.1InstitutionalDiversityandGrowth553.2GeographicalDiversity593.3RegionalDistribution593.4StageofDevelopment653.2SizedistributionofAfricanMFIs67 3. Copyright2008TheAfricanUnionCommission33.5ProductMixbyTypeofProviderandTrend703.6GrowthandFinancialPerformance733.7MicrofinanceinitsearlyyearsinAfrica763.8LatestDevelopmentsinAfricanMicrofinance803.9Presentdaydevelopmentsandtrend83IV.INDUSTRYCHALLENGES844.1UnevenSectorsDevelopment844.2Outreachislimitedandunevenlyspread854.3Highclientdropouts864.4Neglectingtobuildindustryinfrastructure864.5LimitedCapacityandResources874.6TooFrequentParadigmShifts894.7Missiondriftisreal904.8PoorFinancialPerformance916.6IndustrysSWOTAnalysis934.7IndustryTrendsandFutureDirection964.8SomeHardAfricanRealities102V.VISIONANDPRINCIPLES1095.1FutureDevelopments1095.2KeyPrinciples1105.3IndustryBestPracticesAReview112 4. Copyright2008TheAfricanUnionCommission45.4GoalsforMicrofinance1185.5RoleoftheStateGovernmentAAssessment1205.6RoleofLocalAuthoritiesanAssessment1265.7RoleofBanks1275.8RoleoftheAU&RegionalEconomicCommunities1285.9RoleofStandardsandBenchmarks129VI.STRATEGIESANDACTIONPLAN1326.1MajorIndustryChallenges1326.2ProposedStrategy134APPENDICES36.3ActionPlan3ENDNOTESANDREFERENCES7 5. Copyright2008TheAfricanUnionCommission5I.INTRODUCTION1.1JustificationandBackgroundAttherootofthedevelopmentofmicrofinanceinAfrica(justlikeisthecaseinotherpoorcountriesworldwide)arethreefundamentalhumanvaluesandprinciplesthefirstofwhichisainstinctforselfpreservationthroughselfhelp,followedcloselybytheneedforcooperationandcollaborationinaccomplishingdifficultandsomewhatmorecomplextasksatthelarger,communitylevel.Andthelastoftheseprinciplesorfeltneedsis(bestexpressedinKiswahilias)MjaliJiraniorsimplycareforyourneighbourinEnglish.Verymuchlikethesethreevaluesorprinciples,microfinancehasthemostmeaningorthrivesbestinadversity;itworksbestwhentargetclientsandserviceprovidersallcooperateandcollaboratethroughselfreliance,eachdoingtheirbestpossiblewithayearningandsenseforselfpreservationbeinguppermostintheirmind.Cooperationandcollaborationontheotherhandworkswell(orifatall)whenindividualteammembershaveasenseofselfworthandselfrespect,combinedwithacriticalselfawarenessofthegreatercommongoodthatcooperationengenders,versusthepursuitofnarrowpersonalinterests.Itisthussothat,thenewlyemergentmicrofinancetechnologyissteadilymakingaccesstofinanceanearpossibilityforthemillionsofpeoplepreviouslyseenasnotfinanciallysecureenoughtobegrantedcredit,norrichenoughtotapintotheirwellspringofgrit,hope,andwealth.Becauseitishighlyeffectiveinenablingeventheworldspoorestpeopletoengageingainfulselfemploymentandnotablyprotectthemselvesfromshocksbyaccumulatinglittlesavings,theAfricanUnion(AU)andseveralregionaleconomicblockshaveallcometoconsiderthedevelopmentofmicrofinanceinAfricatobeofgreatimportance(SADC,2002;COMESA,2003;Koma,2007;Pamacheche,2007)1.Hence,thedecisionbytheAfricanUniontocommissionthisstudyinApril2007,hopingthatitcouldfacilitatetheelaborationofaroadmaptoguidethedevelopmentoftheregionalmicrofinancesector,iswithinthiscontextofjobcreation,economicgrowth,andpovertyreduction/achievementoftheMillenniumDevelopmentGoals(MDGs). 6. Copyright2008TheAfricanUnionCommission6Asoutlinedbythecommissionatthebeginningofthiseffort,thisplansetsoutaminimumsetofpoliciesandstrategies;includingthelegal,regulatory,andinstitutionalframeworks,favourableandcatalytictothedevelopmentofmicrofinanceinfrastructureandserviceswithinAfrica.Inadditiontostrategiesandpolicyareas,thestudyalsooutlinesthecharacterandsizeoftheAfricanmicrofinancesector,asitidentifiesopportunities,strengthsandchallengesitpresentlyfaces.Theroadmapfurtherpresentsadetailedoverviewofthegoodindustrypractices,andmakesrecommendationsonvariousresponsibilitiesformicrofinancesectordevelopmentintheAUmemberstatesgovernmentsforthepublicsectoritself,localauthorities,developmentpartnersand/orforeigninvestors,commercialbanks,andthe11orsoregionaleconomiccommunities.Twoindependentpanelsexaminedandappraiseddraftroadmapadactionplaninatwostageprocess,thisatfirstinvolvedexpertsoftheAfricanUnionCommissionSecretariatand,onlylater,aregionalexpertsteamtowardstheendofJuly20082.Significantly,thesameAfricanInstituteforEconomicDevelopmentandPlanning(IDEP)basedinDakar,Senegal,whichhaspreviouslyhostedmajorregionalpolicyworkshopsandseminarsinthepastwasapproachedbytheAUanddutifullyagreedtohostthisultimatethreedayworkshopformicrofinance.OfthemoreimportantoutcomesofthisworkshopwasthedefinitionoftheAfricanregionalprioritiesasfarasthedevelopmentofmicrofinanceisconcerned(seesection1.5.4below).Thegroupfurthernotablyalsoagreedonastandarddefinitionofmicrofinancefortheregion:MicrofinanceistheprovisionofabroadrangeoffinancialproductsandservicestoalargesegmentoftheAfricanpopulationpreviouslyexcludedfromaccesstofinancialservicesbyconventionalfinancialinstitutionsbyvirtueoftheirsocialandeconomicstatus.Suchprovisionmustbesustainablebothforthemicrofinanceinstitutionsandfortheborrowers3Asidefrombroadlysettingtheconceptualboundariesforthesector,the30expertsassembledinDakar,Senegal,on30and31July2008statedavisionanddesiredrolefortheAfricanmicrofinanceindustry,thus:Microfinanceisakeycomponentoffinancialsystemsandaimsatchangingandimprovingthelivesoftheeconomicallyandsociallyvulnerablepoorpeople,creatingjobs,andcontributingtothedevelopmentofboththelocalandthenationaleconomy...4 7. Copyright2008TheAfricanUnionCommission71.2ScopeandfocusofstudyTakingthesetwodefinitionsoftheAfricanmicrofinancesectorasnowadoptedbytheAU,thisroadmapexploresseveralissuespriortomakingsuggestions,forinstance,onpossibilitiesofacceleratinggrowthandtakingthesectoruptothenextlevelsofdevelopment.ItalsopresentsthestoryaboutwhyandhowdidtheAfricanmicrofinancesectorcomeintobeinginthefirstplace,sinceknowingthepastcanoftenhelpdecidewheretogotonextinalong,difficultjourney.Forexample,theroadmapanswersquestionssuchas:Wastheemergenceanddevelopmentofthemicrofinancesystemintheregionanactofaccident,orwasitthenaturaloutcomeofarestlesssearchforrealsolutionstootherwiserepressedneeds?DoestheAfricanmicrofinancesystemshareanyhistoricalparallelswithsimilarsystemsthathaveevolvedelsewhereinAsia,CentralandEasternEurope,and/ortheLatinAmericanregions?Atitspresentstageofdevelopment,whatcanAfricalearnfromtheotherregionalmicrofinancesystems(India,2007;LatinAmerica,2006;EasternandCentralEurope,2006;Asia,2008)thatcouldspiceup,improve,oracceleratethegrowthofitsownmicrofinancesystem?Secondly,asasystemoffinancialintermediation,doesmicrofinanceofferanyrealhopetotheregionsmorethan600millionpeoplerelentlesslylookingtoimprovetheirlivesandliftthemselvesoutofpoverty?Underwhatcircumstancesandconditionsdoesmicrofinanceprovidethemosthopefulanswerstotheregionspoorestfamiliesandindividualsstrugglingtoimprovetheirlives?Canmicrofinancebecomearealsolution(orpartofthesolution)tohalvingpovertyandachievingotherMillenniumDevelopmentGoals(MDGs)withinmemberstatesoftheAU?Whoamongthosewhoneedmicrofinancemostintheregionatpresentareabletohaveaccesstotheproductsandserviceswelladaptedtotheirneeds,andhowwellsatisfieddotheyfeelaboutthem,affordability,andthequalityofservicessofarobtainedfromthedifferentmarketplayersorproviders?Dotheyfeelvaluedenough,andwellprotectedbytheserviceprovidersand/ortheirgovernments?Istheincreasingavailabilityofmicrofinanceacrosstheregionchangingorinfluencingtheattitudeofmainstreamfinancialinstitutionsabouttheregionsimpoverishedpopulationsasapotentiallynewmarketsegment? 8. Copyright2008TheAfricanUnionCommission8Thirdly,whatmacroeconomicandpolicyconditionsexistsintheregionthatfacilitiesand/orencourages(hindersand/orthwarts)thedevelopmentofavibrantanddiversemicrofinancesectorintheAfricansoil?CanAfricahopetomodernizeitsfinancialsectoranytimesoonbylearningfromthesuccessesofitsmicrofinancesystem?Isfinancialintegrationwithintheexistingregionalmonetary,trading,andeconomicblockspossibleanytimesoon,andwhatspecificpolicyinitiativesorstrategieswouldthistaketomakeintegrationpossible?Lastly,howefficientanddynamicistheAfricanmicrofinancesystemascomparedtosimilarsystemsevolvingelsewhereinotherpartsoftheworld?Doesthesystemhavestronganddiverseserviceproviders,welladaptedandwelladjustedtosurvivewithintheregionalenvironment?WhatseemstoworkwellornotwithintheAfricanmicrofinancesystem;andwhatworldwideandregionalinstitutionalcaseexamplescantheregionturntoforvaluablelessons,inspiration,orsimplybestpractices?Therestofthisintroductorysectionofroadmapprovidesahistoricalaccountofthedevelopmentofmicrofinanceintheregion,inadditiontohighlightingitsrelevanceandimportancefromaregionalperspective.1.3TheAfricanPoliticalEconomyandPhilosophyofMicrofinanceTheRiseofModernMicrofinanceThephrasemicrofinanceisayoungone;infactonlyemergedintheearlynineties.Atthesametimemicrofinanceactivitiesarenotnewatall:nearlyallcontinentscanshowtraditionalsavingsandcreditsystemsthatdatebackwelloveracenturyandinmanycasesarestilloperationaltoday.Thesetraditionalsystemsaresimpleandeffective:agroupofpeoplepooltheirfinancialresourcesandmakethecapitalavailabletosomegroupmemberstoworkwithit.Afterawhile,theborrowingmembersreturnthecapitaltothememberswhobroughtittogetherintheformofsavings.Thisbasicmechanismhasbeenthemajorliquiditymanagementvehicleforgroupsandcommunitiesexcludedfromaccesstotheformalfinancialsystemfordecades,ifnotcenturies. 9. Copyright2008TheAfricanUnionCommission9Themaincharacteristicofthismechanismisthatitisownermanaged,selfgovernedandselfselfcapitalized.Infact,thesetraditionalsystemsareclosedsystems,makingthemrelativelyimmunetooutsideinterference.InAfrica,thesesystemscomeinanamazingvariety:Stokvels,tontine,esusuandidirarejustsomeofthelocalnamesoftodaysRotatingSavingsandCreditAssociations(ROSCAs).Becausethesesystemsareselfcapitalized,theyaresavingsdrivenbynature.Thismeansthattheydonothaveanyleveragepotential.Inrotatingsystems,amemberhastowaitforawhilebeforeshecanaccessaloanfromthegroup,simplybecauseindividualgroupmembersborrowlargeramountsthantheysave.Therefore,allmembershavetosavetoallowforcreditprovisiontoafew.BringingintheadvantageofmodernfinancialsystemsomodernmicrofinancedaeiscommonlyracedbacktothefoundingoftheGrameenBankin197inBangladesh.Pooledresourceswerenowleveragedwithexternalcreditcapitalsothatmanymorepeoplecouldaccessloanssimultaneously.Modernmicrofinanceisthereforeoftenconsideredtobecreditdrivenasopposedtothesavingsdrivencharacteroftraditionalsystems.EarlydaymodernoperatorssuchasGrameenBankhaveheldontotheleverageprincipleeversince.Theirclientscanonlyaccessloansaftertheyhavebroughtinsavingsregularlyforaconsiderableperiodoftime.Theleverageprincipleusuallyfollowsa1:3ratio;clientscanborrowuptothreetimesthevolumeoftheirsavingsbalance,whichalsofunctionsasalientotheloan.Today,manypractitionershavedroppedthedirectlinkbetweensavingsandloansandprovidecredittowhoeverisconsideredeligible.AlthoughittookrootsinAfricaalmostatthesametimeasitdidinAsiaandLatinAmerica(sometimeinthemid1970s),theAfricanmicrofinancesysteminitspresentformemergedsome25yearsago;theyear1993isanimportantreferenceperiodforpresentdaymicrofinance(seeOteroandRyhne,1994)5.However,withinjustthese15yearsofitsturningpoint,thesystemhasnotonlyevolvedsignificantly;IthasalsoprogressedfastenoughtoapointwhereittodayaloneseemstopresentAfricawiththeclosestandmosthopefulchanceofeverdevelopingamoreinclusivefinancialsystemforitspeople(OkonkwoOsiliandPaulson,2008)6.Whetheritistheregionsmostdevelopedeconomy(SouthAfrica),orleastdevelopedandwarravagedeconomies(SierraLeoneandLiberia),themicrofinancesystemalonecurrentlyprovidesthestructuresforpeoplepreviouslyexcludedfromtheregiontosaveandtakeloans.AsSodokinaptlynotes: 10. Copyright2008TheAfricanUnionCommission10MFIsprovidetheonlymeansoftappingresourcesonbothsidesofthefinancialdividetheyareanewclassofcustomertobanks.Between1999andend2005intheUEMOAzone,publicdepositswithMFIsincreasedsevenfoldwithintheperiodof10years;risingfromCFAF38billiontoCFAF250billion.Inthesameperiod,MFIsdepositswithbanksincreasedinturnbyalmostfourfold,risingfromCFAF13billionin1996toCFAF59billionin20037WhileacknowledgingthefactthatSubSaharanAfricaespeciallysuffersfromlowdomesticandforeigninvestment,highcapitalflight,andlowremittanceflows(relativetootherdevelopingcountries),theILOalsostates:Accesstofinanceisavitalconcernforworkersintheinformaleconomy8Kauffmann(2007)alsoacknowledgestheimportanceofmicroandverysmallenterprisesinAfricaandtheirneedformicrofinance,noting:EveninSouthAfrica,withitsrobustprivatesector,microandverysmallenterprisesprovidedmorethan55percentofalljobsand22percentofGDPin2003,whilebigfirmsaccountedfor64percentofGDPtheconditionsforprivatesectorgrowthexist,butarestillheldbackbyaninadequatefinancialsystem9TwostatementsfromthelatestEconomicReportonAfrica2008(EconomicCommissionforAfrica,ECA,2008)perhapsgivessomeexcellentinsightintoAfricasincreasinglyheightenedinterestinthedevelopmentofmicrofinance.Inpage61ofthereportcoveringdiscussionaboutthesocialdevelopmenttrendsinAfrica,forinstance,theauthorstates:PromotingamoreinclusivedevelopmentprocessincreasesthelongtermgrowthpotentialofAfricancountries10Continuingfurtheronpage63,thesameauthorobserves:ThemainchallengesfacingAfricansinthelabormarketarethelackofdecentjobsintheformalsector,underemploymentandworkingpovertybuttoimprovelaborconditions,governmentsneedtopromotedomesticandforeigninvestmentinsectorsthathavelargeimpactonemployment 11. Copyright2008TheAfricanUnionCommission11Clearlyandimplicitlyhintedatintheabovestatementisareferencetothemillionsofsmallholderfarmerswhoderivetheirlivelihoodalmostexclusivelyfromagricultureandtheequallyubiquitousnanoenterprisesfoundatnearlyeveryhomesteadorhouseholdthroughoutthedevelopingnations(SteelandSnodgrass,2008;Mead,1995)11.YetanotherhinttotheneedtodevelopmicrofinanceinAfricaisevidentlyimpliedinthestatedgoaltoachieveacceleratedandsustainedgrowth,withboththeAUandECAstressingthatAfricangovernmentsshouldmaximizetheuseofallfinancialresourcesattheirdisposal;includingcommodityrevenues,remittances,andparticularlydomesticsavings,notably:Topromoteinfrastructure,investment,innovationandinstitutionalcapacityFinally,theECA2008reportendswithanemphasisonmoreeffortstoboostdomesticsavingsandcallinguponAfricatouseit(theresource)asacriticalandstablesourceoffinancingfordevelopment.Specifically,onpage125,ECAstates:Theemergenceofmicrofinanceinstitutionshascreatedopportunitiesforaccesstocreditforsmallholderfarmersandsmallbusinesses(ECA,2008)ECAfurtherhighlightsthefactthat:ExistingfinancialinstitutionsarethinlyspreadandinefficientinmobilizingdomesticresourcestherebyunderscoringtherelevanceoftheformerintheregionsnewdevelopmentfocusandeffortsInadditiontosustainedandambitiouspolicyreformstomakedoingbusinesseasierandmoreattractiveinAfrica,allrecentinternationaldiscourseonhowtoaccelerategrowthandsimultaneouslyreducepovertyintheregionidentifythelackoffinancingastheprimaryobstacle12.TheAfricaneconomiesespeciallysufferfromverylowlevelsofdomesticsavingsandverypooraccesstointernationalcapitalmarkets13.Hence,themobilizationofdomesticresourcesandexternalfinanceiscriticaltothesuccessinobtainingresourcestofinancetheinvestmentneededtomovetheAfricaneconomiestohigherlevelsofgrowthanddevelopment,andtodrasticallyreducelevelsofpovertythatcontinuetoplaquethecontinent. 12. Copyright2008TheAfricanUnionCommission12AmajorchangeintherecentdiscourseonAfricasdevelopmentisthenewemphasisondomesticsavingsmobilizationattheexpenseofthepreviousdependenceonforeignaidandtradetospurgrowthandreducepoverty.Andthisessentiallybecausethelattersourceoffinancingisfarlessvolatileinnatureandtemperamentthanallotherexternalformsorsourcesofdevelopmentfinancing.Secondly,ascomparedtoexternalsourcesoffinancingfordevelopment,arelianceondomesticsavingsdoesnotnecessarilyincreasethevulnerabilityofthelocalpopulationordevelopmentplanstosudden,unexpectedexternalshocksandinfluenceasisoftenthecasewithforeignsourcesoffunding.And,perhapsmostimportantly,theuntappedpoolofdomesticsavingsishugeandlikelytobereasonablypricedascomparedtoforeignsourcesofcapital.ThefactthatdomesticsavingsforSubSaharanAfricaasaproportionofGrossDomesticProduct(GDP)isroughlyjust17percent(Table1),meansthatitisapotentiallyimportantsourceoffinancingfortheregionsdevelopmentifeffectively(andfullymobilized).Table1FinancingofDevelopment:Sources,Flows,andTrend;from1998to2008(in$bn.)FinancingSource/Year 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998Remittances 14.4 Privatecapitalflows;FDIs 16.7 28.5 20.7 15.8 6.3 12.1 9.9 16.7 13.7Equityflowsnet 24.7 18.0 14.3 9.1 14.0 10.7 18.0 15.5FDIinflows 17.6 11.3 13.6 9.5 15.0 6.5 9.0 6.9PortfolioEquityinflows 7.2 6.7 0.7 0.4 0.1 4.2 9.0 8.7NetofficialflowsOfficialDevelopmentAssistance,ODA 22.9 25.2 25.1 23.3 16.6 10.7 10.7 10.3 10.6Bilateralaidgrantsexcludingtechnicalcoopgrants 28.4 24.2 22.0 14.0 10.0 10.0 9.9 10.1Netdebtflows 3.8 2.8 1.5 2.8 2.0 0.7 1.3 1.8Medium/longterm 2.3 1.7 2.5 1.0 0.1 0.4 0.7 1.3Shortterm 1.5 1.1 1.0 1.8 2.1 1.1 0.6 0.5Netdebtflows 49.3 3.2 0.8 1.2 2.6 0.6 0.7 0.4 0.5Source:ECA,2008Lastly,forAfrica,therelianceondomesticsavingsgivesthepeopleandtheirleadersthefullindependencetopursuetheirprioritieswithoutanyundueexternalinfluenceormanipulationbyotherinterestedpartieswhomighthavethecapitalbutharbourselfishgoals. 13. Copyright2008TheAfricanUnionCommission13ThefirstUNhostedforumtodebatedomesticresourcemobilization,i.e.,TheInternationalConferenceonFinancingforDevelopmentheldinMonterreycity,Mexico,in2002,acknowledgestheprominentroleformicrofinance,noting:DomesticinvestmentbymicroandsmallscaleenterprisesistheprimarysourceofeconomicgrowthandemploymentcreationinAfricaOnitspart,the2004OuagadougouSummitDeclarationandPlanofAction14alsoidentifiesmicrofinanceasapriorityfortheregion,andsoisthe2006ConferenceofAfricanMinistersofFinance,Planning,andEconomicDevelopmentwhoreiteratedtheneedforAfricatotapthedynamicsofmicrofinanceforjobcreationandincomesecurityinAfrica,noting:ThefinancialsystemsinAfricaareillequippedtocollectsmalldeposits[Hence],toenablemicrofinanceproviderstoemerge,grow,andreachouttothepooringreaternumbers,providingadiversityofdemanddrivenandaffordablefinancialservicessuchascredit,savings,insurance,leasing,inventorycredit,andtransfergovernmentsneedtoenact[relevantandresponsiblefinancial]policyandstrategy(emphasismine).Furthermore,whilenotingthatAfricahadalargeshareoftheworldsleastdevelopednations,i.e.,34of49(67.3percent),theSecondAfricaAdvocacyForumheldon14November2002inNewYorkdiscussedmicrocreditasasolutionfortheregioninthecontextofrealizingMillenniumDevelopmentGoals(orMDGs).Onthis,theconferencecommentedthus:ThoughthereisstillagreatneedtomobilizefundstomeettheMDGs,availablefundshavenotbeenorientedtowardspovertyeradicationamethodologythatfocusondomesticmobilizationofresourcesforthepoorestofthepoorwiththeobjectiveofstrengtheningtheirownlocalinstitutions,i.e.,microfinance,[needstobedeveloped]Theconferencealsostressedtheroleoftraditionalsolidaritygrouplendingtechnique,butonethatiswelladaptedtomodernconditions(thisbeingasubtlecodedwordforfinancialinclusionandsustainablefinancialservices;twoofthebiggestandlongruuningchallengesinmicrofinancedevelopment).Secondly,theconferenceemphasizedtheroleofstrengtheninglocalinstitutionsbybuildingonwhatexists;reinforcingmicrofinancetoempowertheAfricanprivatesectorwasthethirdkeysolutionproposedbytheforumtobuildmicrocredit.Lastly,theconferencecalledforafocusonimprovingefficiency.Onitspart,NEPADrecognizesmicrofinancein 14. Copyright2008TheAfricanUnionCommission14paragraph148ofitsFrameworkofCooperationdocumentasoneoftheareasinthemobilizationofandmanagementofresourceswhereAfricamustbuildstrengthandsystems.Specifically,NEPADstates:NationalandinternationalpoliciesinsupportofNEPADshouldencouragelocalsavingsthroughmicrofinanceInsum,thedevelopmentofmicrofinanceisaveryimportantgoalforAfrica,whichholdspromisenotonlyforgrowthandpovertyreduction,butalsofortheopportunityofempoweringthelongexcludedpopulationfinancially.Tohighlighttheinnovativenessofmicrofinance,SheriefandSharief(inanundatedpaper),forinstance,states:oneofthemostintractableeconomicproblemsforpoorcountrieshasbeenthehighpriceoroutrightunavailabilityofcreditin[poorruralandurban]communities.Primarilybecauseofweakinstitutionalinfrastructureinruralandpoorurbanareas,formalsectorbanksandotherfinancialintermediarieshavefacedseeminglyinsuperableinformationasymmetriesandconsequentlyhaveexperiencedpersistentlyhighcostsanddefaultrates15...Thus,theemergenceandevolutionofmicrofinanceinthelast25yearsworldwideisofgreatandparticularinteresttoAfrica;formorebackgroundinformationtothisargumentseeGuldeetal(2006)16.1.4SomeTheoreticalaswellasEmpiricalAspectsofMicrofinanceAccesstofinancialservicesmatterstoallpeople,richandpoor17.AccordingtoAllenHammonoftheWorldBankInstitute(n.d2)18:Beingpoordoesnoteliminateanyonefromtheneedtoengageincommerceandmarketprocesses:virtuallyallpoorhouseholdstradecashandlabortomeetasignificantpartoftheirbasicdailyneedsSecondly,anationsfinancialsystemprovidesanimportantlinkbetweenitscurrentandfutureoutputandconsumption.Whenafarmertakesaloantobuyseedsandfertilizertoimproveperunithectareyield,forinstance,heorsheisessentiallybringingforward2Notdatedsource 15. Copyright2008TheAfricanUnionCommission15consumptionagainstfutureincome.Inthesamesense,firmswouldnotbeabletoraisecapitaltofinanceinvestmentinmachinesandequipmentwithoutthehelpofawellfunctioningfinancialsystemunlesstheyhaveaccumulatedenoughprofitsinthepreviousyearsofoperation.Similarly,acashconstrainedfarmerwouldnotbeabletoprovidethebestorfulleducationofhis/herchildrenonthestrengthofhisorherfutureincome,unlessheorshehasaccesstoareliableandwellfunctioningfinancialsystemtoday.Thefamedlinkbetweenaccesstofinanceandpovertyreductiondiscussedaboveinsection1.4hasbeentestedandprovenintherecentpast(e.g.MurdochandAportela,2006)19.OneofthestudiesexploringthislinkinIndia,forinstance,foundstrongandsystematicdropsinthelevelsofruralpovertyof0.34percentforeveryperunitincreasesinnumberofruralbankedlocations.Evenfarbackinhistory,whilewritingaboutcapitalin1943,therenownedAustrianeconomistJosephSchumpeter,forinstance,hadalsomadeasimilarobservationbetweenlinksinimprovedaccesstofiancsituationtopovertyreduction.Inhisverywords:Capitalisthetoolwithwhichtalentednewcomersareempoweredandfreedfromthedisadvantagesofbirththatwouldotherwisearisefromtheirlackofinheritedwealthandabsenceofconnectionstothenetworkofwelloffincumbents20... Inamorerecentperiod,theUnitedNationsAdvisorsGrouponInclusiveFinancialSectors(UNAG)itselfhassimilarlynoted,thus:"Accesstofinancialservicesprovidesasafetynettofamilies,communitiesandcountriessotheycanbettercopeduringchallengingtimes"Thesefinancialservicessupportinnovationsinagriculturalproduction,foodsecurityandsmallscalefarmingandshouldbeconsideredasanimportantlongtermremedytoaffectconditionslikethosethatledtothecurrentfoodcrisis21Inhisearlieranalysisofcapital,Schumpeteractuallydemonstratedthelinkbetweenaccesstofinanceandtheexpansionofeconomicopportunities,throughalevelingoffoftheplayingfield,i.e.,accesstocreditalsoprovidetheoutsidersandthepoorachance[tocompeteforgainfuleconomicopportunities].Beck,DemirgucKunt,andLevine(2004)22,ascitedinlaTorre,Gozzi,andSchmukler(2006),alsofoundpositivelinksbetweenaccesstocapitalandeconomicgrowth,i.e.,incountrieswithhigherfinancialsectordepth,theincomeofthepoorest20percentofthepopulationseemstoalsogrowfasterthantheaverageGDPpercapita,whereasincome 16. Copyright2008TheAfricanUnionCommission16inequalityinsteaddropsofforfallsatamuchhigherrate.Moreover,withoutaccesstocredit,manyprofitableinvestmentopportunitiesforexamplethecreationofnewfirmsandinnovationwouldsimplyjustnottakeplace.Lately,monetaryeconomistsseeanotherrolethatmicrofinanceinstitutionsarealsoincreasinglyperformingverywell,muchbeyondtheirinitialgoalofjustbeingabletoprovidethepoorestwithmicrocreditorfacilitiesformanagingmicrosavingsforjobcreationandimprovementofincomes23.ThemonetaryimpactofMFIsactivitiesisrealizedthroughthewholesaleloansadvancedbycommercialbanksforonlendingtotheretaillevelcustomers.Secondly,sincemanyMFIsthemselvesrelyonbanksindisbursementandcollectionofloanrepaymentsfromretaillevelmicrofinanceclientstheirultimatecustomers,thefirstamongmonetaryeconomiststostudytheirindustrialbehaviormorecloselyseemtoseeaccountswhichtheymaintainwiththebanksassomekindofdefactosuper depositaccounts (Sodokin)24.Inyetanothersense,thesemonetaryeconomistsalsoseeMFIstobeactivelyinvolvedincreatingnewmoneyincome,i.e.,generatingpositivepurchasingpower,whenevertheircreditgrantingactivitiescausetheircustomerstomakeinvestmentsurplusesthatfarexceedthesavingsmobilizedandintermediatedfromthesameclientele.Thus,newspecificmoneycomestobeingfromtheirlendingandsavingsmobilizationactivitiesevenifthefundssomobilizedarecompulsorysavingsortreatedbytheMFIssimplyasabankwouldtreatafixedsecurityadvancedbyacustomeragainstaloan.1.5.1MicrofinanceandPovertyReductionInthefirstinstance,ifanimprovedaccesstofinancesituationcanactuallyunleashtheinvestmentandproductionpotentialofthepoorpeopledirectly,itshouldbeencouragedandsupportedmoreactivelyandaggressively.ConsiderthatAfricahasbeenpoliticallyindependentforatleast50years;fornearlyaslongasAsiaandLatinAmerica,theothertwocontinentsoncecolonizedbyEurope,yetitisonlyintheregionworldwidewherethelargestnumberandmostofthepoorestpeoplestillliveinabjectpoverty,thatis,withoutadequatefood,shelter,orhumansecurity(Figure1). 17. Copyright2008TheAfricanUnionCommission17Exceptforabriefperiodof10yearsjustafterindependence,Africaseconomiesandinstitutionsallstagnatedorcollapsedsoonafterwithinadecade,andweretoremainsoformostoflast50years.Throughoutthe1970s,1980s,andthebetterhalfof1990s,African 18. Copyright2008TheAfricanUnionCommission18economiesnearlyfailedtoproduceevenenoughfoodfortheirfastgrowingpopulations,createjobs,raiseincomes,orevenbroadentheiraccesstobasicsocialservicessuchashealthcare,education,andsecurityuntiljust8yearsago(Figure2).In1984,forinstance,theregionwiththehighestshareoftheworldspoor(definedasthoselivingonlessthanUS$1perday),with44percentofthetotal,wasEastAsia.OnethirdwasinChina.However,by2004,EastAsiasshareofthepoorhadfallento17percent(with13percentofthisforChinaalone),whiletheshareofSouthAsiahadjumpedfrom35percentin1984to46percentin2004.ButthemoststrikingriseinpovertylevelswasthatinSubSaharanAfrica,whichboomedfrom16percentin1984to31percent. 19. Copyright2008TheAfricanUnionCommission19Whiletheregionseconomieshavesince1997shownsomesignsofrevival,andalthoughtheworldcommunity,too,seemsforoncetobemorecommittedtohalvingpovertyby2015(throughmultilateral,bilateral,andsharedeconomiccooperation),regionaleconomicgrowthforAfricaupto2008(beforetheOctobermeltdownoftheglobalfinancialsystem)wasearlierprojectedtostabilizeatjustaround6percent;butthingswilldefinitelygetworsewiththeworldeconomyalreadyinrecession.Butevenbeforethemeltdown,developmentexpertswerealreadyexpressingfearsthatAfricascurrentpovertylevelsarejustmuchtoohigh,andstillgrowingrapidly:By2015whentherestoftheworldisexpectedtohavehalvedpoverty,astaggering87percentofAfricaspopulationisprojectedtoliveonlessthanUS$1aday25Between1990andyearend2004,Africahad70millionadditionalpoorpeoplethanithadadecadeearlier26.NotingthatAfricareceivedoverUS$607billion(or5timestheamountofdevelopmentaid)27since1970withoutanyrealimprovementinlivingstandards,thenewregionaldevelopmentthinkingiswaryoftheoldstylepovertyreductionstrategies28.Thesestrategiesunderestimatedthebenefitsofengagingthepoorpeoplethemselvesdirectlyinfindinglastingsolutionstopoverty.IncontrasttotheWorldBankandInternationalMonetaryFund(IMF)inspireddevelopmentphilosophyofthebygoneera(convenientlycodedasAfricaslostdecades),whereemphasiswasonlargescaleandacceleratedspeedofcapitalaccumulation,thenewAUapproach(originallythoughtthroughbyNEPAD)looksforanswerstopovertyreductionthroughimprovementsinpeoplescapacitytoparticipatedirectlyindevelopmentactivitiesandgoodgovernance,alongsideimprovementstotheinfrastructureandpolicyenvironmentsthatareconducivetobusiness.Underthenewdevelopmentparadigm,mobilizingdomesticresourcesinfinancingdevelopmentisparamount.Alsoimportantistheinvestinginbuildinglocalinstitutionsandpeoplescapacity,expansionofthedemocraticspace,andastrengtheningofgovernancestructuresateveryleveloforganization.Allrecentactionplansandstrategiestowardsendingpoverty,notablytheUNsMillenniumDevelopmentProject,TheCommissionforAfrica,WorldEconomicForum2004and2005,andHumanDevelopmentReport2005,allclearlyseemtoplacegreateraccesstofinancebypoorpeopleatahigherlevel,orparwithprivatesectordevelopmentastheenginestoAfricasfutureprosperityandequitablegrowth.Theprovisionofmicrofinance,therefore,fitsinperfectlywithAfricasnewdevelopmentthinking,whichnowemphasizesonthedirectpoorpeoplesparticipationininvestmentandproduction,alsoknownaspropoorgrowth 20. Copyright2008TheAfricanUnionCommission20paradigmshift.InAfricasnewdevelopmentthinking,therefore,theabilityoffinancialmarketstomobilizeandintermediatedomesticcapitalforshorttermandlongterminvestmentandeconomicdevelopmentisprominentamongtheleadingstrategies.Microfinancetheprovisionoftinyloans,insuranceprotection,ordepositfacilitiesforsmallsavingsandmatchingpaymentssystemstothevastpopulationattheBottomofthePyramid),usingnewandunconventionalfinancialtechnologyhasassumedevengreatersignificanceforthecontinent,giventhehugeunexploitedopportunitiesattheBOP.OthersnowbelievemicrofinancetobeasanimportantserviceasanyotherinitsownrightandshouldbeencouragedandallowedtodevelopfullytoexpandAfricasfinancialsystem.Intheshorttimethatithasbeenavailable,accumulatedevidenceshowsthatwhenthepoorhaveaccesstoappropriatefinancethatfitstheirneeds,theydoeasilyincreasetheireconomicactivitieshigherlevelsofproductivityandoutput,andalsoclearlyinvestwiselyinbothshorttermandlongtermhouseholdsassets.Manyrecentscientificstudiesofthepoorpeoplesaccesstoanduseoffinancialservices29nowshowclearlyhowtheytakeadvantageoftheservicestoprotectthemselvesfromeconomicandsocialshocks,aswellasinvestinpreviouslyunavailableopportunities(Table2.1)30.Table2.1TypicalLoanApplicationbyMFIClientsOptions WithintheEnterprise WithintheHousehold1. Addingtoworkingcapital Homeimprovement2. Diversifyingintodifferententerprises Purchasinglandorbuildingfornonbusinesspurposes3. Startingabusiness Payingforschool/educationortraining4. Purchasingnewequipment/assets Medicaltreatment/insurance5. Constructingoraddingnewbusinessinfrastructure Loanrepayment6. Businessinfrastructureimprovement Meetingdailyneedsorretirementneeds7. Vehiclepurchase8. Buyinghouseholdgoods9. Ceremonyorsocialexpenditure10. Holiday/leisureexpenditure11. JewelrypurchaseSource:JohnstonandMurdoch,2007 21. Copyright2008TheAfricanUnionCommission21Asshowninthetable,thepoor(aswellasthepoorestofthepoor)doesapplyfinancesmartlytoexpandordiversifytheireconomicactivitiesorfinancetheirimmediatehouseholdorindividualconsumptionneedsespeciallyinmomentswhentheirimmediateresourcesareeitherinadequateortotallylacking.Hence,thepoorestpeopleattheBOPapplyaccesstofinanceremarkablywell,justaswellastheirhighnetworthcontemporaries(Table2.2) 31.Sincethepooralreadyhavereasonenoughtoapplyaccesstofinancemorecarefully,towardsimprovingtheirlives,therefore,whattheyevidentlylackistheopportunity,eitherbecauseofdistance,theabsenceoffacilities,poorhandlingbyproviders,orhighcostofservice.Table2.2LoanApplicationbyPurposeandLevelofIncomeLevelofHouseholdIncomeLoanApplication HouseholdslivingbelowthepovertylineHouseholdswithpercapitaincome1to3timesthepovertylineHouseholdswithpercapitaincomemorethan3timesthepovertylineorhigherWithintheBusiness 49 55 57WithintheHousehold 35 43 45Other 23 6 7No.ofRandomHouseholds 69 208 271Source:Johnston,Jr.,andJonathan,Murdoch,2007Clearly,asshownintables2.1and2.2above,alargepartofAfricaspopulationcurrentlylivinginpovertyperfectlyknowshowtoworktheirwayoutofpoverty.However,theydonothaveaccesstofinancetoenablethemputtheirideastopractice.Specificevidenceontheimpactofmicrofinanceaccumulatedoverthelasttwodecadesshowsthatimprovedaccessbytheruralandurbanpoorespeciallywhencombinedwithotherservicessuchaseducationcanreduceorcompletelyeliminatepoverty32.Specifically,theliteratureshowsthatimprovedaccesstomicrofinancenotonlyleadstoincreasedsavingratesamongthepoorpeople33;butalsothataccesstoappropriatelydesignedandaffordablypricedfinancialservicesproducesmanyotherpositiveimpacts;includingconsiderableimprovementstohouseholdincomes,increasedexpenditureonfoodandspendingonhomeimprovementandeducation,andthediversificationofincomebase,and(seeFigure1). 22. Copyright2008TheAfricanUnionCommission22Source:Dunford,Christopher2001,pp.8Basedoncarefullycontrolledpaneldataofcomparisonsbetweenwomen(andtheiryoungestchildrenofuptothreeyearsold)withonetothreeyearsofparticipationinCreditwithEducation,ontheonehand,andwomenineitherbaselineorcontrolgroups,ontheotherhand,theresultsunambiguouslyindicatedincreasedlevelsoflivelihoodsecurityamongclientsmoreregularearningsthroughouttheyear,assetaccumulationandconsumptionsmoothing(Dunford,2001).DirectlycitingfromDunford(2001),thespecificresultsfromthestudy(whichcoveredfiveAfricancountries,threeLatinAmerican,andoneAsian)shows: 23. Copyright2008TheAfricanUnionCommission23WithregardtononfarmincomesinGhanaInGhana,betweenthebaselineandfollowupperiods,CreditwithEducationclientsenjoyedasignificantlygreaterincreaseinmonthlynonfarmearningsalmostdoubleascomparedtononparticipantsinthesamecommunitiesorresidentslivingincontrolcommunities.Clientsmostcommonlyattributedtheirincreasedincomestobusinessexpansion,reducedinputcostsasaresultofbuyinginbulkorwithcashratherthanoncredit,andnewactivitiesorproductsmadepossiblebyaccesstoloans34...IntermsofimpactonassetsinBurkinaFasoInBurkinaFaso,afterapproximatelythreeyears,borrowersincreasedthescaleoftheirincomegeneratingactivitiesbyanaverageof80percent,androughlyonethirdoftherespondentsmorethandoubledthescaleoftheiractivity.Manywomenwerefoundtohavemadesignificantinvestmentsinincreasingorimprovingtheirproductivecapacitybybuyingfixedassets,suchasaluminumandclaycookingpots,andbyestablishingregularmarketsites...AndwithrespecttohelpingthepoorinbettermanagingshocksandemergenciesinMaliInMali,programparticipationenhancedhouseholdsabilitytoreduceriskanddealwithperiodsofcrisisoreconomicdifficulty.Clientsparticipatingforoneandtwoyearsweresignificantlylesslikelythanincomingclientstohaveexperiencedaperiodofacutefoodinsecurityortohavebeenunabletoconducttheirenterpriseduetoalackofmoneyinthepreceding12monthsInyetanothersourceafterreviewing32earlyimpactstudiesofmicrocredit,SebstadandChen(1996)35,too,alsofoundpositiveincreasesinaverageenterpriseincomesofbetween25percentand40percent,whilePittandKhandkar(1998) 36inastudyinvolving1,800microfinanceclientsinBangladesh,foundpositivechangesinhouseholdconsumption,accumulationofnonlandassets,andimprovedschoolingforchildren.Remarkably,thelatterstudyshowedthat5percentofthestudiedclientshadcrossedthepovertylineeachyearduetoimpactofmicrocreditontheirincomesandhouseholdconsumption.Indisastersituationsandpostconflictareas,too,studiesofimpactshowthataccesstomicrocreditbyaffectedfamiliesenabledthemtorebuildtheireconomicactivitiesandlivelihoodsifdesignedappropriatelyandconvenientlydelivered37. 24. Copyright2008TheAfricanUnionCommission24Moreover,inadditiontobeingabletoexpandanddiversifytheireconomicbaseormeetingneedsforwhichresourceswerepreviouslyscarce,theclientscanbecomeempoweredeconomicagents,withamoreimprovedandmorereliableaccesstofinance,asexplainedbyPrahalad(2005)38.Povertyexists,notjustbecausethoseaffectedbyitlackthemeanstoimprovetheirwellbeing;itisalsobecausetheyhavelimitedincome,thepooroftenhavetobuythingsinsmallerquantities,henceenduppayingmoreforthesamegoodsandservices.Andbecausetheydonothavetheirownmeansoftransport,thepooroftendomostoftheirshoppinglocallyinmoreexpensivesmallerstores.Iftheyareabletosecurealoanatall,itisoftenatamuchhigherpricebecauseoflimitedsupply;butiftheygetmorereliableaccesstofinancialservices,thepoorwouldovercomealloftheirdisadvantages,asaptlycapturedbyPrahalad:Whenthepooraretreatedasconsumers,theycanreapthebenefitsofrespect,choiceandselfesteem,besidesanopportunityforthemtoclimboutofthepovertytrap.InDecember2003,whiledeclaring2005TheYearofMicrocredit,KofiAnnan(thenUNSecretaryGeneral);notedthus:thegreatestchallengebeforetheglobalcommunityinimprovingthewellbeingofthosewithoutadequatefood,shelterordignifiedlifeistheconstraintsthatexcludetheordinarypeoplefromfullparticipationinthefinancialsector1.5.2MicrofinanceandJobCreationAsofJanuary2007,nearly600millionpeople,or50.6percentofAfricaspopulation,werelivinginabsolutepoverty,thatis,onlessthan$1aday.Besides,consideringtheimportanceoffinanceasearlierdiscussed,thefactthatonlyfourpercentoftheregionspopulationhadaccesstobankaccountsasofyearend200639andjust1percentbankloanssuggeststhatlackofaccesstofinanceisamuchdeeperprobleminthecontinentthanperceived.Notwithstandingthefailureoffinancialsectorreformsinthe1980sand1990stoexpandaccesstofinancetothemajorityofforthegeneralpopulation,thealmostsimultaneousemergenceanddevelopmentofmicrofinanceinthesameperiodprovidesagreatdealofnewhopetoAfricatoachievesomekindoffinancialinclusion.However,torealizeitsgoalsinthisregard,Africahasnochoicebuttoinfluencethedirectionandpaceofgrowthofitsfledglingmicrofinancesystem.Thisisthefirst 25. Copyright2008TheAfricanUnionCommission25rationalefortheAUcommissionedroadmapforadvancingmicrofinance.Throughthedevelopmentofmicrofinanceandlinkageswithconventionalbankandnonbankfinancialinstitutions,itisbothpossibleanddesirabletocreateanew,allinclusivefinancialsystemforAfrica40.Andintheregion,microfinancealonemosteasilyandcosteffectivelypromisesfinancialinclusionforallinthenearfuture41.1.5.3ThePromiseandexpansionofMicrofinanceinAfricaEmerginginAfricaalmostwithoutnoticethreedecadesago,microfinancehasunexpectedlyblossomedintoadistinctivelyprospectivenewindustryfortheregion;alreadyithasitsowngrowinglinguafranca,reportingstandards,specialratingagencies,adregulatoryandsupervisoryframeworks,nottomentionuniqueloanlossprovisioningguidelinesandperformancebenchmarks.Evencompletelynewcareershaveemerged,alongwithspecializedcourses,faculty,andprofessionalmembershipassociationsforthemicrofinancepractitioners.ProFund,establishedin1995,wasthefirstevermicrofinanceinvestmentfund;butcurrently,thereisaproliferationofMicrofinanceInvestmentVehicles(MIVs),onlinepeertopeerbasedproviders(e.g.,KivaandeBaysMicroPlace),aswellasnumerousventurecapitalandloanguaranteefunds.Asof31December2007,therewasmore100specializedinvestmentfirmsfocusingsolelyontheopportunities,whicharecontinuouslyandrapidlyevolvingwiththenewindustryonadailybasis.ByendofDecember2007,evenleadingglobalmerchantandinvestmentbanks,e.g.J.PMorganandMcKinsey,allhadmovedintomicrofinance.Similarly,worldwideleadingratingfirmssuchMoodysandStandard&Poorshadalreadyrepositionedforenteringthenewmarket.Projectionsshowthatinthenext10years,microfinancewillgrow10foldworldwidetobecomeamarketofassetsworthmorethan$250billion42.Furthermore,microfinanceisprovingtobesuchapromisinginvestmentopportunitythatevensomeoftheregulatedfinancialintermediariesthatoncefoundtheretailendoftheBOPmarketunattractivearerethinkingtheirfuture.Indeed,manybanksareinaphenomenondubbedbytheindustryasdownscalingmovingintoorexploringentrytothemarket.AsurveyofprofitdrivenprovidersofmicrofinancebyCGAP43in2004identified124suchorganizations;butafterjustanotherperiodoftwoyears,thenumberofprofitdrivenorcommercialmicrofinanceinstitutionshadincreasedto227financialintermediaries 26. Copyright2008TheAfricanUnionCommission26worldwide44.Itseems,therefore,thatifitisdevelopedproperlyandaggressively,microfinanceisaneconomicandfinancialactivitythatcouldhelpcreatethejobsthatAfricacurrentlybadlyneedstospurgrowthandreducepovertylevels.Inspiteofitshumbleroots,microfinancecombinesthebestofideas,ontheonehand,frommainstreamfinancialproviders,and,ontheotherhand,theubiquitousinformalselfhelpfinancialsystemsevolvedbythepoorpeoplethemselves.ThislastsystemevolvedmostnotablyinAfricaundercolonialpoliciesthatforcedmonetizationoftheeconomythroughforcedlabor,butparadoxicallylimitedthenativesaccesstofinance.Becauseofitshumbleorigins,microfinancehasevolvedintoauniqueanddynamicsystemoffinancialservicecapableofmeetingthediversefinancialneedsofthevastpopulationattheBOP.Notsurprisingly,therefore,ratherthanthepoorpeoplefearing,mistrusting,orelectingnottoseekmicrofinance;astheypreviouslydidconventionalfinancialserviceproviders,theyactuallyhave(inverylargenumbers)embracedandapplieditenthusiasticallyinbetteringtheirlives.Asofyearend2006,morethan133millionpoorfamilieswereusingmicrofinanceworldwideandchangingtheirlives45.Yet,judgingfromitsdemonstratedimpact,microfinancecouldbetheinterventionthatfinallyhelpsAfricatoachievetheMillenniumDevelopmentGoals(MDGs)46.AsAfricastrivestohalvepovertyby2015,awellfunctioningmicrofinancesystemcouldopenupaworldofnewandgreateropportunitiestotheregion,whichcurrentlyishometothehighestnumberofpeoplelivingwithoutadequatefood,shelter,orhumansecurityintheworld.Asmentionedbefore,Africaaloneishometo50.6%oftheworldspoorestpeople;asatJanuary,2007.Inthepasttwodecadesalone,theproportionofpeoplelivinginpovertyincreasedmostrapidlyinAfricathanitdidanywhereelseintheworld(Figure3). 27. Copyright2008TheAfricanUnionCommission27Worryingly,Africaisalsotheonlycontinentthatisnotlikelytohalvethenumberofitspoorestby2015undertheUNsponsoredMillenniumDevelopmentGoals.ButthereishopethatmicrofinanceandgainsfromfurtherpolicyreformscanenabletheregiontomeettheMDGs.Accumulatingevidenceoverthelasttwodecadesshowsthatgreateraccesstomicrofinancebythepoorestcanresultinpovertyreduction.Specifically,theliteratureshowsthatgreateraccesstomicrofinancenotonlyleadstoincreasedsavingratesamongpoorpeopleascomparedtothosewithoutanyaccess47,butitalsoproduceswiderrangeofpositiveimpactsonthepoor.Theseinclude 28. Copyright2008TheAfricanUnionCommission28householdincomes,spendingonhomeimprovementandeducation,diversificationofincomebase,andexpenditureonfood48.Further,asanewtypeofbusinessorganizationinAfrica,microfinanceisavaluablesourceofemploymentandincomes4950.Forinstance,in2006,intheCEMACareaalone,themicrofinancesectordirectlyemployed10,300peopleinanactivitythatpreviouslydidnotexistjust25yearsbeforethen51.Inthesameperiod,microfinanceinstitutionsintheUEMOAsubregionemployedalmostasimilarnumberofpeople11,250tobeexact.Inthissense,theroadmapcanhelptheregiontoplanhowtomaximizegrowthanddevelopmentofthesectortoexpandjobopportunitiesandincreaseincomesdirectlyandindirectly.ThemediannumberofpeoplenowworkingforvariousmicrofinanceinstitutionsinAfrica,forexample,is285,whileeachoftheinstitutionshasatotaloutstandingloanportfolioof$9.1millionintermsofassets.Withrespecttojobcreationandenterprisedevelopment,therefore,itmeansthatthesealternativefinancialintermediarieshavemovedtotheupperendofmediumsizedenterprisebracket,muchcherishedbyAfricaanddubbedasthemissingmiddleorcompetitiveenterpriseswithgoodgrowthopportunities(Figure4.1). 29. Copyright2008TheAfricanUnionCommission290.0020.0040.0060.0080.00100.00120.00140.00(inUSDmillions)Source:INAFI Africa 2007Figure 4.1. Current Scale of African MFIs Operation(At 30/09/2007)Deposits Active Gross Loan Portfolio1.5.4SomeCurrentWeaknessDespiterapidgrowthandexpansion,thecontinentsmicrofinanceinfrastructureremainsweakascomparedtosystemsinotherregions(Beck,Thorsten,andAsli,DemirgucKund,(2008)52.Forinstance,towardstheendofthe1990s,Africahad45percentofalloperatingmicrofinanceinstitutionsglobally53,whileAsiaandLatinAmericaeachhad36.4percentand18.6percent. 30. Copyright2008TheAfricanUnionCommission30WhilethenumberofMFIsinAfricahasevolvedsteadilyasithasinotherpartsoftheglobe,ithasnotreachedouttoasmanypeopleasinAsiaorLatinAmerica.Asofend2006,forinstance,Africasmicrofinancesystemwasreachingjust11.4percentoftheregionspooresthouseholds,whereasinAsiaandLatinAmericathesystemwasreachingoutto68percentand20.2percent(Figure4.2).01020304050607080020406080100120140%coveragemillionsofpoorestfamiliesFigure4.2.TheProportionofPoorestFamilieswithAccess(inmillions)PerRegionAt31/12/2006Poorest families (in millions) Coverage (in millions) %Covergae of poorest families)WiththeexceptionofEgyptandSouthAfrica,accesstofinancegloballyislowestinAfrica,with16ofthecountriesintheregionhavingapopulationpenetrationrateofbelow20percentandtherestbetween20percentand40percentasofendof2005(Figure7.1)54. 31. Copyright2008TheAfricanUnionCommission31Moreover,whiletherehasbeentremendousgrowthinoutreach,therecentratingsindicatethatprofitdrivenAfricanMFIsareondriftingawayfromservingthepoorestandmostvulnerablepopulations.Theestimatedaverageloansizerelativetoincomeperpersonhasrisento77percent,from71percentin2002andevenfurtherupto89%by2003.Averageloansizeperborrowerisalsoontheincreasenowstandingslightlyabove$346perperson.Afewofthetransformedorinspiringtotransformmicrofinanceinstitutionsareclearlydriftingfromclientsatorbelowthepovertyline.OneinstitutioninSenegalnowhasthehighestaverageloansizesintheregion;nowstandingat$1,321perborrower.Incontrast,theMFIservingthepoorestclients,withadepthofreachat20%oftheGDPandloansizeof50%oftheAfricanaverage,isfoundinUganda.EastAfricahassomeofthedeepestreachingMFIsintheregion.Inspiteofitspotentialforpovertyreductionandenterprisedevelopment,and(despiteitswidespreadacceptanceandrecognitionintheregion),accesstofinanceingeneralandmicrofinanceinparticularremainsseverelylimitedinAfrica.Altogether,justabout4percentoftheestimated600millionpoorestresidentshaveanyaccesstofinanceofanykind(Figure4.3)55. 32. Copyright2008TheAfricanUnionCommission320.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0AngolaMozambiqueGabonZimbabweSeychellesCentral Africa RepublicGuineaSudanTogoMalawiCote dIvoireCameroonMaliTanzaniaBeninCape VerdeFigure 4.3. Population with access to MF (%)ThemostoptimisticofcurrentestimatesofaccesstofinancialservicesinAfricatodaysuggeststhat,notmorethan20percentoftheregionstotaladultpopulationhaveanaccountataformalorsemiformalfinancialinstitution56.Worsestill,justabout1percentofthepopulationhaseverobtainedaloanfromaformalfinancialinstitution.Accesstomicrofinancealsovariesconsiderablybycountryand 33. Copyright2008TheAfricanUnionCommission33subregion,asindicatedinFigure5above.ThemicrofinancesysteminTunisia,forexample,isreachingfarmoreofthecountryspopulationthanthesystemsinSenegal,Togo,Uganda,orEthiopia.Notonlyisthenumberofnewmicrofinanceinstitutionsbeingestablishedbecomingfewer,butalsothenumberofnewmicrofinancecustomersinsomeofthemoreadvancedmarketsstartingtoslowdownordecline.Furthermore,whereas75percentofthemicrofinanceinstitutionsinAsiaareconcentratedinruralareas,inAfrica65percentareconcentratedintheurbanareas.Inadditiontothelimitedandunbalancedoutreach,themicrofinancesysteminAfricaislaggingbehindthesystemsinotherregionsinperformanceaswell(Figure5).Forinstance,theAfricanMFIshaverelativelysmalleraverageloanportfolios,higherloanoperatingexpenseratio,butmorenotablylowerreturnstoequityandassets. 34. Copyright2008TheAfricanUnionCommission34Withregardtoresourcesforfundinggrowth,Africaisalsotheregionthatismostlacking.Itreceivestheleastamountofthenearly$1billionfundsinvestedannuallyinmicrofinanceworldwide.Morethan90percentofthe120microfinanceinstitutionssurveyedinAfricabyCGAPin2004citedlackofcapitalasthesinglemostimportantconstrainttotheirgrowth57.EventhoughthelevelofinvestmentinAfricasmicrofinancesystemhasincreasedlatelyfromabout1.3percentoftotalfundsinvestedin2003toabout6percentby2006,theabsoluteamountofexternalcapitaltoAfricaisdisproportionatelysmallcomparedtoinvestmentsinAsiasandLatinAmericasmicrofinancesystems(Table4).Just7percentofMFIinvestmentsmadeby39MIVs(MicrofinanceInvestmentVehicles)areinAfrica. 35. Copyright2008TheAfricanUnionCommission35AndamongtheinternationalfinancialinstitutionssuchastheWorldBankorIFAD(InternationalFundforAgriculturalDevelopment),only6.4percentoftotalinvestmentsin2005wasplacedinAfrica;initially,thiswasamere1.3percent.AsofApril2007,investorsinAfricanmicrofinanceinstitutionswere14,excludingtheInternationalFinanceCorporation(IFC)andAfricaDevelopmentBank(AfDB),whichhavealsoinvestedinmicrofinanceinstitutionsintheregion.IFCsworldwidemicrofinanceportfolioisUSD260million.AnotherimportantsourceofinvestmentfundsformicrofinanceinAfricaincludeAFDandUSAID,whichbothalsoplacethebulkoftheirinvestmentsinLatinAmerica(37percent)thaninAfrica(18percent),whilethebulkgoestoMFIsineasternEuropeandcountriesformerlyundertheSovietUnionlikePoland,Yugoslavia,andBosnia,etc.Table3DistributionofMIVs(USD,Millions)at31December2006Region Privatefunds Publicinvestors Allinvestors Total No.ofRecipients Debt Equity Debt Equity Guarantees EasternEurope&CentralAsia 35.6 73.5 323 68.2 2 502.2 90LatinAmerica&Caribbean 162.8 67.4 150.9 13.4 63.3 457.9 195SubSaharanAfrica 31.2 14.9 1.7 6.1 9 62.9 112EastAsia&Pacific 23.9 1.2 6 3.7 0.9 35.7 64SouthAsia 27.7 1 0 5.3 1.1 29 48MiddleEast&NorthAfrica 1.8 0 0 0 7 8.8 8TOTAL 276.9 158 481.6 96.6 83.3 1,096.50 517Source:MicroRate,2006AnewdevelopmentinAfricaistheentryofAsianbasedmicrofinanceinstitutionsintheAfricanmarket.ThesearenotablyfromIndiaandBangladesh.BRACalreadyhasoperationsinTanzania,Sudan,andUganda,whileGrameenbankhaspartnershipsinUganda,Ethiopia,andMorocco.ApartfromtheseAsianMFIs,therearealsoEuropeanandAmericaninvestmentbanksmakingentryinAfricanmicrofinance,includingProCreditHoldingsofGermany,AccessHoldingsofFrance,andACCIONInternationalofUSA,mostlythrough 36. Copyright2008TheAfricanUnionCommission36acquisitionsandmergers.Withintheregion,therearealsomergers,forinstancebetweenEquityBankinKenyaandUgandaMicrofinanceLtd(UML).Andearlier,thereweremergersbetweenMicrocreditKenyaandUMU,thepredecessortoUML.Whatisshapinganddrivingthesenewdevelopments?Arethesenewdevelopmentstobecelebrated,feared,orencouragedattheexpenseofwhatisthetraditional?1.5.5SummaryPointsandDirectionfortheSectorThestudycommissionedbytheAUclearlyindicatesthattheAfricanmicrofinancesystemisatdifferentdevelopmentstagesindifferentcountries,includingsomethatarestillatthetakeoffstages,othersatthegrowthstagewithwelldevelopedandfastgrowingmarkets,andstillotheratthematuritystageorfacingdecay,declineand/orstagnation.Amongthefactorstoconsiderwhileassessingthelevelofdevelopmentofthesectorindifferentpartsofthecontinent,themajoroneswouldseemtoincludethefollowing:1. Institutionaldiversitythatincludescooperatives,MFIs,NGOs,andcommercialbanks;2. Scaleofoutreach,asevidencedbyalargenumberofborrowers,largenumberofsaversandawidebranchnetwork;3. Numberofprovidersthatareinstitutionallyandfinanciallyselfsustaining,withapresenceofgoodleadership,stronggovernanceandeffectiveinformationsystem;4. Diverseproductbasethatcouldincludeahostofproductsandserviceslikecommercialcredit,housingcredit,microinsurance,leasing,agriculturalfinance,savings,moneytransfer,etc;5. Closenessordistanceofretailinstitutionspracticesandperformancefromtheperspectiveofinternationalbestpracticesasevidencedbycostoflending,returnoninvestments,andcustomersatisfaction,etc;6. AffordabilityofService;7. Competitiveness,cooperation,andmarketdisciplineamongproviders; 37. Copyright2008TheAfricanUnionCommission378. DegreeofintegrationofMFIsintotheoverallfinancialsystemofthecountry;9. DegreeofintegrationofMFIsintotheoverallmacroeconomicpolicyframework;10. Levelofcooperationandcoordinationamongstakeholders;11. Quantityandqualityofresourcesdedicatedtomicrofinance;12. Pooloftalentandhumanresourcebase;and13. Speedanddirectionofgrowthofthesector.Theexpertsteamacknowledgedandmadesalientcommentsonthegeneralstateofmicrofinanceinthesubregions,asfollows:1. Wherethereisineffectiveregulation,thereisaproblemofrecruitingcapableMFIstaff,e.g.ChiefExecutiveOfficers(CEOs)andChiefFinanceOfficers(CFOs);2. Theobjectiveofmicrofinanceistohelpinpovertyalleviationefforts.However,highinterestratesarecausingoppositeresultsinsomecountries;3. Asbanksdownscale,theypoachstafffromMFIs,therebyweakeningtheseinstitutionsconsiderably;4. NondiscretionaryorsmartsubsidiesfromgovernmentshinderdevelopmentofMFIs,asthispromotesdependencyandunderminesmarketdiscipline;5. Eventhoughmicrofinancecancontributesignificantlytoeconomicgrowthanddevelopment,itisnotapanaceaforallofAfricasproblems;6. Microfinancecannotbediscussedinisolation;ithastobediscussedinrelationtootherchallengessuchastheneedsforlandreform,improveinfrastructure,createenvironmentsfriendlierormoreconducivetodoingbusiness,andbetterand/oranimprovedaccesstonationalresourcesandownershipissues; 38. Copyright2008TheAfricanUnionCommission387. TheAUshouldexpandtheintroductionoftheRoadmaptoincludecurrentdevelopmentchallengesandtheroleofmicrofinanceintheachievementofAfricasdevelopmentobjectives;8. TheRoadmapshouldshowanassessmentoftheimpactofmicrofinanceonaregionalbasis,drawingfromthefieldvisits;9. ThereisneedtoprioritizetherecommendationsintheActionplan;10. ThestatisticsintheRoadmapneedtobeupdatedonacontinuousbasis;11. AfricangovernmentsshouldbesensitizedabouttheroleofregulationofMFIs;12. TheRoadmapshouldspecificallyaddressthefinancialneedsofwomen,theyouthandpeoplelivingwithHIV/AIDs;13. TheRoadmapshouldincludeananalysisoftheimpactofMFIsonpovertyeradication,jobcreation,savingsculture,etc;14. AssomeNGOstransformintocommercialentities,theAUshouldfacilitatethedocumentationofsuchtransformationinAfricatoprovidereference;inthetransformationprocess,caremustbetakentoprevent,minimize,oravoidmissiondriftaltogether;15. TheRoadmapshouldincludestrategiesinbusinessdevelopmentservicesforbothMFIsandretaillevelclients;16. Thereisneedtogivespecialattentiontothepoor,genderandthepeoplesofarstillexcludedfromthesystem,i.e.,themostvulnerablegroups;17. Thereisneedtoclarifythetermscapitalizationtoinclude(financialandtechnical)aspectsofcapacitybuilding;and,18. Withinthecontextofthecrosscuttingnatureofgenderissues,itwasrecommendedthatgenderbemainstreamedintheRoadmapbyensuringthatthefollowinggenderspecificrecommendationsareincludedineachtheme: EliminategenderdiscriminatorypracticescontainedinnewMFIpolicies; ThedevelopmentofnewMFIpoliciesshouldbehomegrown,andinvolveallstakeholders,includingwomen; TheproliferationofMFIproductsfromthetraditionalbankingsectorshouldcomplywithmicrofinancecharacteristicsandcomponents;and 39. Copyright2008TheAfricanUnionCommission39 Theexpansionofcurrent4%coverageinfinancialservicesand1%increditservicesmustbescaleduptorespondtotheurgentneedtoenhancethemicroandSMEsectortoformalprivatesectorenterpriseswithinthecontextofindustrializationobjectivesoftheAfricanUnion.TheteamobservedthatAUsplantoincorporatemicrofinanceintothebroaderrealmsofeconomicgrowthandpovertyalleviationeffortswasawelcomeandtimelymove.However,inordertoensurethatAUseffortsbearfruit,otherstakeholdersmustbesensitizedtoplaytheirrolesmoreeffectively.KeystakeholdersidentifiedbybothgroupsincludeAfricangovernments,MFIs,country/regionalMFnetworksandotherexternalinvestors.ThegroupsmaderecommendationsforeachofthestakeholdersandtheserecommendationssupportorareadditionaltorecommendationsalreadydocumentedintheRoadmap.Therecommendationscutacrossseveralthemes,butthemajoronesarerelatedtoregulation,funding,researchanddevelopmentandcapacitybuilding.Themeetingmadethefollowingrecommendations:A. AfricanGovernments1. Itwasageneralconsensusthatgovernmentsneedtobepartandparcelofmicrofinancedevelopment,especiallyinprovidingaconduciveenvironmentformicrofinancetoprosper;2. Whilegovernmentsshouldnotbedirectmicrofinanceproviders,theyshouldplayastrongfacilitationrolebyensuringthat,effectivelawsthatsupportdevelopmentofmicrofinanceareenactedwithinreasonabletimelimits.Theyshouldsupportdevelopmentofeffectivepolicies,andsuchpoliciesshouldbegearedtowardsanallinclusivefinancialsector;3. Provideand/ormotivateMFIsandotherfinancialserviceproviderstoextendoutreachtotheruralareaswhoaregreatlydisadvantagedbecauseofhighdeliverycostsduetoinadequateinfrastructure;4. Whiledraftingmicrofinancepoliciesandregulations,thereisneedforadequateconsultationofallrelevantstakeholders,forexample,MFIs,cooperatives,relevantgovernmentministriesandcentralbankssothatbestpracticescanformthebasistoinformsuchaprocess,andalsoensurethatthepoliciesreflectAfricanrealities;5. Someconsumerlendersaregenerallyinterestedinprofitandnotsocioeconomicgrowth.Therefore,thegovernmentsneedtoensurethattherearelawsthatprotectconsumersfromworseningpovertyconditionscausedbyconsumerloans; 40. Copyright2008TheAfricanUnionCommission406. Giventhecapacityconstraintsinthemicrofinancesector,thereisneedtocreate/supporttraininginstitutionsthatrunspecializedmicrofinancecourses;7. ThereisneedtoconductgenderdisaggregatedassessmentoftheresourcesrequiredtoreachthesectionsofthepopulationthatarenotcurrentlyservedbyMFIs;8. WhileAfricangovernmentspursueliberalizationpolicies,effortsshouldbemadetoencouragelocalinvestorstoparticipateinthemicrofinancesector;9. AfricangovernmentsneedtoworkonanenablingenvironmentforMicrofinance:secureaccessoflowincomepeopletoallmicrofinanceservicesandproducts(includingsavings,microinsuranceandmoneytransfers);10. AfricangovernmentsneedtosupportMFIsbyfundingcapacitybuildinginitiativesandresearch;and11. TheAfricangovernmentsshouldensurethatthecentralbankregulationofficershavethenecessarycapacitytosupervisethemicrofinancesector.B. RecommendationstoAfricanMFIsThereisstrongevidencetosuggestthatAfricanMFIscandobetterinmanyareasofperformancevariousfactorsdespitetheshortageoffunds;forexample,theexpertsteamobservedthatmanyoftheseMFIsimportproductandservicedeliverymodelsfromoutsidetheregion,butdoverylittleintermsofadaptingthemtothelocalcontexttomakethemmorerelevantorresponsivetothelocalneeds.SomekeyrecommendationsdirectedtoMFIsinclude:1. ThatMFIsshouldemphasizeinvestmentsintrainingandcapacitybuildingofstaffandmanagementsystemsinordertoimproveproductivity,improveprofessionalismandqualityoflendinganddepositsbase;2. AfricanMFIsshouldberunalongbusinesslinesinordertoreducetheirdependencysyndrome;3. ThereisneedforMFIstosetasidefundsforconductingoffeasibilitystudies,andstrengtheningmarketingandtrainingfunctions.Thiswillhelpthemdesignanddiversifyproductsalongcustomerneeds,andhenceadoptademanddrivenapproachasopposedtosupplydrivenapproachthatiscurrentlyprevalentacrossAfrica; 41. Copyright2008TheAfricanUnionCommission414. ThereisneedtoexplorepotentialuseofICTtoimprovescaleofoutreach;5. MFIsthatarenotallowedbythelawtoofferalltypesofproductsshouldgointopartnershipforexamplewithinsurancecompaniesandpostofficesorotherrelevantinstitutionsuntilthelegalenvironmentschange;and6. Needtoofferproductsatreasonablepriceforthecustomers(MFIsneedtobemoreefficient);Thereisneedtopaymoreattentiontoinnovationofproducts,serviceandservicedelivery;C. RecommendationstoAfricancountrynetworksFromthediscussionstheconsensusthatemergedwasthatcountryMFnetworksdoorshouldplayacriticalrole.Thereexistnetworksinalmosteverycountry,andtherearealsoregionalMFnetworksinexistence,butwhilesomenetworksareactiveandvibrantsomearedormant.TherewillbeneedtocoordinatemoreattheregionalleveltoensuresynergiesaredevelopedacrossAfrica.Specificrecommendationsmadefornetworksinclude:1. Atthecountrylevel,thenetworksshouldplayamorefeasiblecoordinatingandfacilitatingrolebringingstakeholderstogetherinallissuesthataffectthedevelopmentofmicrofinanceinthespecificcountries;2. Thereisneedforcountrynetworkstosensitizeandexposeauditorstouniquefeaturesofmicrofinancetoenablethemeffectivelyauditmicrofinanceinstitutions;3. NationalandregionalnetworksneedtofocusoncapacityandinstitutionalbuildingofAfricanMFIs;and4. TheregionalnetworksshouldpromoteexchangeamongAfricanMFIsandensurethattheyarecoveringallAfricanregions.D. RecommendationstotheAfricanUnionTheparticipantswereunanimousthattheAfricanUnionshouldbeamoreactivepartnerinpromotingthecauseofmicrofinanceinAfrica,andtheymadethefollowingspecificrecommendations:1. TheAUshouldfacilitatetheelaborationofanAfricanMicrofinanceCharterandanimplementationmechanism; 42. Copyright2008TheAfricanUnionCommission422. TheAUshouldfacilitatethecreationofacodeofconductformicrofinanceinAfrica;3. IntegratethemicrofinancepoliciesoftheRECsinlinewithotherintegrationprogrammesmanifestedonthecontinent;4. TheAUshouldlobbyMemberStatestointegratemicrofinanceintothefinancialsectorandpromotetheestablishmentofadiversified,viableandperennialmicrofinancesectorasanintegralcomponentofthenationalfinancialsystem;5. TheAUshouldencourageMemberStatestopromotePublicPrivatepartnership(PPPs)especiallyintheareaofinfrastructuredevelopmentinordertoimprovescaleofoutreachbyMFserviceproviders;6. TheAUshouldinstitutionalizeanannualAfricanMicrofinanceForum;7. TheAfricanUnionshouldensurelobbyingtomakeitpossibletogenerateinternalfinancialresources(inAfricae.g.AfDB);8. TheAUshouldaddapageonmicrofinanceontheirwebsite(databaseforMFIs,consultantsinmicrofinance,linkstonationalandregionalnetworksetc.);9. ProvidesupportfortrainingandresearchcentersinAfricainthemainlanguages;basedonpractitionersexperience(directlyandbyconvincinggovernmentstodothesame);10. TheAUshouldsupportMFIsinexploringalternativewaysofraisingcapitale.g.savingsmobilization,betteruseofDiasporaremittances,etc;11. Thereisneedtodevelopstrategiesforthedevelopmentofsustainablemicrofinanceinconflictandpostconflictcountries;12. ProvidescholarshipsforMFIsstafftoattendtrainingcourses;13. ProvidefundingforMFIstodoresearchandsupportdocumentationofimpactofmicrofinanceondevelopment,forexample,throughtheuseofcasestudies;14. Supporttranslationoftrainingmaterialinmajorlanguages(supportsecondandthirdlinetrainers);15. SupportICTusebyMFIs(fundingandlinkagestodonorssuchasGatesfoundation,CGAPandothers); 43. Copyright2008TheAfricanUnionCommission4316. SetupInnovationgrantstoencourageMFIstoinnovateinmicrofinance(products,services,useoftechnologyetc.);17. Setprioritiesbyregion/subregion;18. Promoteexchange,internshipandvolunteerprogrammesamongMFIs(scholarships);19. Supportthecoordinationofregionalnetworks;20. TheAUshouldassistinthedevelopmentofbenchmarks,standardsandratings.Inthisprocess,existingbenchmarks,standardsandratingsshouldbeusedasabasis;1.5.6TowardsaRegionalDefinitionofmicrofinanceTheworkshopagreedonthefollowingdefinitionofmicrofinance:Microfinanceistheprovisionofabroadrangeoffinancialproductsandservicestopeoplewithlowincomeswho,byvirtueoftheirsocialandeconomicstatus,areexcludedfromconventionalfinancialinstitutions.Suchprovisionmustbesustainablebothforthemicrofinanceinstitutionsandfortheborrowers...Microfinanceisakeycomponentoffinancialsystemsandaimsatchangingandimprovingthelivesofpeoplewithlowincomes,creatingjobsandcontributingtothedevelopmentofboththelocalandthenationaleconomy... 44. Copyright2008TheAfricanUnionCommission44II.PROCESSANDMETHODOLOGY2.1PurposeNotwithstandingthehugeenthusiasmformicrofinancenotedabove(Prahalad,C.,K.,2005)58,whatdoesthefuturereallyholdformicrofinanceinAfrica?Tobeginwith(anddespitethemanyknownbenefitsofgreateraccesstofinance),amajorityofthepoorAfricanpopulationisstillvirtuallyexcludedfromaccesstoanyinstitutionalorreliablefinancialsystemfromcoasttocoast(Gulde,AnneMarrie,Catherine,Patillo,Catherine,andJakobChristensenwithKevinCareyandSmitaWagh,2006)59.Duetotheemergenceofmicrofinancesome15yearsago,accesshascertainlyimprovedsomehowinmanypartsoftheregion,butasisunderscoredbytheexpertsworkshopinDakar,Senegal,inJuly2008,therearemanyobstaclesandconcernsthatimpedetheexpansiononareasonablescale.Thus,tomakeanotableincreaseinreachingevenmoreofthelargeexcludedpopulation,newstrategiesandsolutionstofurtherstrengthandbetterorganizethesectorarebothurgentandimportant.Threeofthemostformidableindustrychallengesaddressedbytheroadmapinclude(a)thedoublyvexingquestionofhowtolowerthecostofservicedeliverywhilescalingupoutreach.Secondly,thereisthedifficultquestionof(b)howtocontainandminimizethedisruptiveeffectsofgrowthandincreasingcomplexityasmicrofinanceevolvesandmaturesintoadynamicsystem,yettodosoinamannerthatstillpreservesitsmissionandidentity.Thethirddifficultquestionishowtomakethemicrofinancesystemawellintegratedpartoftheoverallfinancialsystem,yetallowsittoretainitsdynamismandresponsivenesstothepooralive.Allthesequestionshavebeenaddressedintheroadmap.Inthisregard,thisAUcommissionedstudyandroadmappresentssomeideasandamediumtermactionplanthatifimplementedcouldleadtogreateroutreachandtheestablishmentofavibrant,professionallyrunpanAfricanmicrofinanceindustry.TheroadmapwascommissionedinApril2007bytheAfricaUnion(AU).Withinthe2006to2008programactivitiesoftheUniontitledMandate,MainObjectives,andFunctions:PriorityPrograms,MajorEconomicChallengesforContemporaryAfrica,theneedforthisroadmapisunderscoredastheAUhopestoraisesignificantlythelevelofinvestmentandtradeintheregion.Specifically,inpages16to50ofthe 45. Copyright2008TheAfricanUnionCommission45AfricanUnionsinstitutionalframeworkformobilizingcapitalresourcesoriginallydevelopedbyNEPAD,ittargetstoincreasedomesticsavingsandinvestments;bothforeignanddomestic,bytappingintoadditionalresourcespreviouslyoutsidethefinancialsystem.Tellingly,theorganizationmentionsnationalsavingsbyfirmsandhouseholds,whichneedtobesubstantiallyincreased(seepage37ofthesaiddocument)3.UndertheumbrellaofactivitiesleadingtotherealizationofanAfricanMonetaryUnion(AMU),thedocumentsexplicitlydebatesaboutthemeansandtheknowhowto:Createamoreempatheticenvironmentforbankingthepresentlyunbankedpopulationandamoreinclusiveattitudetotheregionspoor;itwillpositivelyaffectaccess,aswillattemptsatimprovingthephysicalinfrastructureandtechnologyplatform.(NEPADsfirstlistedobjectiveremainstheeradicationofpoverty.)Inthesamespirit,Chapter5ofSADCsStrategicRoadMap(seepages126to127)declarestheintentionoftheregionaleconomiccommunityto:CreatetheconditionsforsoundfinancialinstitutionstherebyimprovethepublictrustintheinstitutionsAnotherofSADCsstrategicdocuments,i.e.,RISDP,openlyurgesmembergovernmentstoencouragethedevelopmentofamicrofinancesectorandfinancialinstitutionstoprovideafullerspectrumofservicestohouseholds(SADCRISDPlan,2003).Sofar,SADCistheonlyoneofthe14overlappingRECsinAfricathathasthoughtthroughaPrinciplesFrameworkforregionaltradeandintegrationininvestmentandtheprovisionoffinancialservices(SADC,July200).Withthedevelopmentofthisroadmap,therefore,theAfricanUnionjoinstheSADCregioninforgingabrighterfutureformicrofinanceintheregion,consideringitsimportanceandgreatpotential.Inpreparinganddisseminatingthisroadmap,theUnionnotonlyhopestoinfluenceandencourageothersmallerRECstoalsoplanforthedevelopmentofthesectorintheirmembercountries,butalsotoforgepolicyharmonyandconvergencethroughouttheregion.3Notethatifthecurrentmeasuresoffinancialdepth(M2/GDP,Percentageshareofdomesticcredittotheprivatesector,ratiooftotalfinancialsectorassetstoGDP)arecorrectandaccurate,theamountofhouseholddepositsheldincommercialbanksinAfricaisjustaverysmallfractionofthoseheldinformallybysmallfirmsandthelowincomepopulationwhoarelargelyexcluded. 46. Copyright2008TheAfricanUnionCommission46Themostoutstandingaspectoftheroadmap,though,isitsfocusonthemobilizationofdomesticfinancialresourcesanddevelopmentofgreaterlinkagesbetweenformalandalternativefinancialintermediariesasthemaindriverstothefuturegrowthanddevelopmentofthemicrofinanceindustryinAfrica.2.2DefinitionsofKeyTermsTheoveralldefinitionformicrofinancewithinthecontextofthisroadmapwaslaidoutbytheAUduringthevalidationworkshopof30and31July2008heldinDakar,Senegal,attheAfricanInstituteforEconomicDevelopmentandPlanning(IDEP).Inthisconnection,theofficialdefinitionofmicrofinanceandstatedpurposeastreatedinthisroadmapisthusasoutlinedbytheAU,thus:Microfinanceistheprovisionofabroadrangeoffinancialproductsandservicestopeoplewithlowincomeswho,byvirtueoftheirsocialandeconomicstatus,areexcludedfromconventionalfinancialinstitutions.Suchprovisionmustbesustainablebothforthemicrofinanceinstitutionsandfortheborrowers Microfinance is a key component of financial systems and aims at changing and improving the lives of people with lowincomes,creatingjobsandcontributingtothedevelopmentofboththelocalandthenationaleconomyNonetheless,fromanintellectualperspective;giventhedynamicandcontinuouslyevolvingnatureofmicrofinance,thissectionpresentsotherequallyvalidconceptionoftheartorscienceofbankingandlendingverylittlesumsofmoneytoahistoricallyfinanciallyexcludedpopulationinlargepartduetotheirrealorperceivedhighriskprofile,lackofatrackrecord,oronthebasisofnothavingthekindsofassetsthattraditionalfinancialintermediariesalwaysconsideredtobegoodsecurityfortherisksinvolved.Therefore,inthisdocumentthetermmicrofinanceisalsoageneralreferencetotheuniquesetoftechnologiesthatactuallymakesitpossibleforanyfinancialservicescompanytoconvenientlyandaffordablydeliveranyselfsustainingproductsandservicestotheworldsmostvulnerablepopulationsinbothsocialandeconomicterms60.Alternatively,thetermalsoreferscollectivelytothegroupofselfsustainingfinancialservicesdesignedandtargetedatthesociallyandeconomicallydisadvantagedpopulationswhoaretraditionallyexcludedbyconventionalfinancialinstitutions.Similarly,AmadouSy(2006)61alsodescribesmicrofinancesystemthus: 47. Copyright2008TheAfricanUnionCommission47Microfinanceisamoreformalizedsystemofmobilizingsmallsavingsandtransformingtheseintoawiderangeofservicesmicrofinanceisatermthat[embracesasetofsocialandfinancialdevicesdesignedtoovercomeinstitutionalrigiditiesofformalfinancialinstitutionsandtocompensateforlimitationsofthetargetmarketsegment,i.e.,thepoorpeoplewhohavenoregularincomes/mostvulnerabletoshocksWhatsetsmicrofinanceapartfromconventionalfinancialsystemsisitshighdegreeofflexibility62andfrighteninglysimpleifsomewhatunorthodox,approachtocreditriskanalysisandmanagement,butwhileatthesametimeservingacustomerclassthattypicallylacks 48. Copyright2008TheAfricanUnionCommission48assets63ortrackrecord,andisneitherwelleducatednorinformedaboutfinancialservicesgenerally.Asobservedbythe2007NobelPeacePrizeLaureateProf.MuhammadYunus,theBangladeshieconomistandfounderandmanagingdirectorofGrameenBank:Microfinanceisarevolutioninbankingthathassucceededinturningthefieldupsidedown.Ithasopeneddoorsthatforyearsdeniedfinancialservicestothepoor;whenbankslenttotherich,themicrofinanceinstitutionslenttothepoor.Whenbankslenttomen,theylenttowomen.Whenbanksmadelargeloans,theymadesmallones.Whenbanksrequiredcollateral,theirloanswerecollateralfree.Whenbanksrequiredendlesspaperwork,theirloanswerevirtuallypapersandthusfriendlytoalargelyilliteratecustomergroup.Whenclientshadtocometothebank,themicrolendersinsteadwenttotheclients64Inthisregard,microfinanceservicesshouldbedesignedtomeettheneedsandmatchthecapacityofitsprospectivecustomers.Therefore,itisalsonecessarytoimplementproceduresspecificallydesignedtothatend.Okoye65notes:Microfinance,ofwhichmicrocreditisacomponent,isasubsetofflexiblestructuresandsystemsbywhichawiderangeoffinancialandenterprisedevelopmentservicesareofferedtoMicroenterpriseownersinanaffordableandconvenientmannerAsaterm,therefore,microfinancehasathirdlevelofmeaning,whichgoesbeyondthecoreproduct:itevenencompassesservicedeliverymechanismsandprocesses,allwrappedofwhichareuptogetherasonething.StuartRutherford66alsoseemstoacknowledgethissamefact,stating:Microfinanceiswhenafinancialproductiswellsuitedtothelowincomepopulationscapacitytosaveandtheirneedsforlumpsums;orifproductdeliverysystemsareconvenient,andwhentheproviderinstitutionitselfiswelladaptedtodeliveringsuchproductsBywayofsummary,themicrofinancerevolutioninAfricaandelsewhereconsistedofasetofinstitutionalinnovationsaimedatresolvinginformationalconstraintswithoutrelyingonwealthasthebasicmandatorycollateral,e.g.grouplendingwithjointliability,villagebanking,andindividuallendingmethodologyinwhichtheanalysisofclientcharacterandprojectedcashflowfromtargetedinvestmentprojectisconsideredthemoreimportantproxyforabilityandwillingnesstopay.Furthermore,thefactthatloan 49. Copyright2008TheAfricanUnionCommission49disbursementinsolidaritygrouplendingisstaggeredamonggroupmembers,andthatincrementallybiggerloansizesareabsolutelydependentonpastgoodloanrepaymentrecord,introducesdynamicincentivesintothebasicmodel.Otherdynamicincentives,forinstancewithindividualloans,includesgraduatedinterestraterebatesormoreflexibletermsthataremadeconditionaltotimelyweeklyormonthlyinstallmentsthroughoutaloanrepaymentcycle.YetstillotherMFIs,dependingonclientsrecord,exemptgoodborrowersfromcertainstandardrequirementswhentheytakefutureloans.Regrettably,thewealthofinformationprivatelyheldbydifferentMFIsonparticularMFIsclientscreditworthinesssincetakingtheirfirstmicrofinanceloanliesburied,ratherthandocumentedanddisseminatedforthegreaterpublicgood.Furtherstill,duetopoorBox1.CharacteristicsofMicrofinanceSmallValueLoans:Comparedtoregularfinancialproducts,theloansofferedbyMFIsarealmostalwayssmallinvalue,notonlybecauseoftheneedtomatchsizeandcapacitytorepay,butalsodeliberatelytominimizecreditriskswhiletheproviderlearnsmoreaboutthecreditworthinessofcustomer.Poorindividualsoftenownlittleornocollateralatallagainstwhichtoborrow.Theotherreasonforsmallvalueloansinmicrofinanceistheinvestmentopportunitiesinwhichthelowincomeandpoorclientscaneffectivelyinvestgiventheirlimitedexperienceandcapacity.Inanycase,becausemostMFIoperationshavelargelybeendonationbased,fewcanaffordtogivelargesumsofmoney,atleastinitially.AlongwiththedesireofmanyMFIstoserveasmanyindividualsasfeasible,thislimitedcapitalbasehastogetherforcedloanstobetypicallysmallinvalue.HighEffectiveInterestRates:Tocovertheircosts(andinitiallybecauseMFIswerenotabletopricetheirproductsindependentlywithoutreferencetotherateschargedbybanksintheiroperatingenvironment),MFIloanshaveattractedhighinterestrates;thoughothersattributethistothelackofcollateralbackingforloans,henceratesareinclusiveofriskpremium.Highsustainabilitythreshold:moreMFIsaregraduallybecomingfinanciallyselfsustaining.However,becauseofhighvolumeandsmallvalueloans,scaleandaggressiveriskcontainmentisimportanttoreducingcostsandturningprofits.Shortterm,frequentrepayments:MFIloansaretypicallyshortterm;justfor12months,180days,orevenshorterthan90days.Repaymentsarefrequent;weekly,twiceamonth,andalmostneverwithgraceperiod.Understandably,MFIstendtoservemostlytradingandcommercialactivitieswherecashflowishighandrelativelyveryfewservemanufacturingandagriculturalactivities.Becauseofshortandfrequentloancycles,themostsuccessfulMFIshavetendedtoexcludetheruralbasedandpoorestofthepoorfromtheirservices.SuccessivelylargerLoans:MFIsallprovidesmallvalueloans,butoffersuccessivelybiggerloanstoclientsaspartoftheirriskmanagementstrategy.Themoretheygettoknowclients,themoreMFIsarewillingtogivebiggerloansandbetterterms.Relativelyhighoperationalcosts:Onrelativeterms,MFIshavebeenlesseffectiveinmanagingcosts,thoughthisischanging.Whileitisalsotruethatthisissomehowrelatedtotheabovecharacteristics,lackofstandardsorexplicitexpectationsintheinitialdevelopmentofmicrofinancehadnotencouragedMFIstostreamlineoperationalcosts.Yetatthesametime,consideringthesmallvalueofloansgivenMFIsandthegenerallyharshbusinessenvironmentunderwhichtheyoperate,theinitiallyveryhighoperatingcostsseemsjustifiable. 50. Copyright2008TheAfricanUnionCommission50coordinationandlackofuniversalcoverage,existingcreditregistriesestablishedincountrieslikePeru,SouthAfrica,orBoliviawherethesystemsarewellentrenchedtohelpmonitormicrofinancerisksalsoseemsnottohaveperformedtheirroleeffectively.Forthefirsttimeever,thisregionalroadmaplaysoutanactionplanforthedevelopmentofmicrofinanceinAfrica.Secondly,inadditiontolayingoutthestrategyforfuturedevelopmentoftheindustry,theroadmapalsopresentsbasicprinciplesandavisionforthesectorthatiswelladaptedtoitsneedsandpriorities.Asmentionedearlier,theactionplanisalsooutstandingforitsgreateremphasisonlocalresourcemobilizationandgreaterparticipationofclientsthemselvesinthefuturedevelopmentofmicrofinancethroughequityparticipationamongotheravenues.WhilealsotryingtobolsterthecurrentpushforanallinclusivefinancialsystemforAfrica,theroadmapwiselyavoidspeggingmuchoftheexpectedresultsupontherolesthatretailbanksmaybeexpectedtoshoulder:Mostregulatedfinancialinstitutionsthoughtabletoevolveallinclusiveproductsandservicesareenterprisesprimedandready.Changingtheirfocusrequiresmajorincentivesneitheraresystemsissuesaddressedexhaustivelybyimprovementstolegalorinstitutionsframeworksalone,ascurrentlyassumedpossiblebysomeleadingindustryplaudits67Bybuildinguponadetailedregionalanalysisofpublicpolicyandinterventionsinmicrofinancedevelopmentofacrossthe53AUmemberstates,theroadmapalsohelpshighlighttheareasinwhichgreaterinterstatecooperation,coordination,andultimateintegrationofthesectorwiththemainstreamfinancialsystemwouldyieldoptimumresults.Inconclusion,themicrofinancesysteminAfricahaspreviouslydevelopedalmostwithoutanyguidance,support,orinfluencefromanyofthe14activeRegionalEconomicCommunities(RECs).Yet,ifproperlysupportedandencouragedtogrowanddevelop,thissectorholdsmuchpromiseforAfricaneconomiesinjobcreation,povertyreduction,andimprovingcompetitivenessofitshugeinformaleconomy. 51. Copyright2008TheAfricanUnionCommission512.2ArrangementandorganizationThefirstsectionoftheroadmapdescribessystematicallytheforcesthathaveshapedtheevolutionofmicrofinanceinAfricaoverthepast23years.ItexplainsthekindofmicrofinancethatisbeneficialforAfricainthecomingdecades.ThismaterialalsobackdropsthebasicprinciplesthatAfricashouldadoptasitseekstochangecourseandredirecttheevolutionanddevelopmentofitsmicrofinancesystem,aspresentedinsectionfour.Thesectionalsodrawsfromspecificchallenges,priorities,andopportunitiesdiscussedearlierinSection1.Thenextsectionoftheroadmapdescribeshowthedocumentwasproducedandunderlinesitsweaknesses.Thethirdsectiongivesadetailedaccountofthesystemspresentstateandthechallengesandopportunitiesforfuturedevelopment.Inamoregeneralway,thesectionalsohighlightsareasofactionwheregreaterregionalcooperationandcoordinationwouldleadtoimprovedresultsthaniftheissueswereaddressedindependentlybyeachstate.Thefifthandlastsectionlaysout10majoractionsandresourcesrequiredinredirectingandsupportingtheevolutionofamicrofinancesystemmorealignedtotheneedsofAfrica.2.3ProcessandMethodologyTodevelopthisroadmap,itwasfirstnecessarytoassessandunderstandthestateofthemicrofinancesystemintheregionuptotheperiodendinginJune2007.Theinformationforthispurposecameprimarilyfromexistingreportsandstudiesofthesector.Unfortunately,mostofthisinformationeitherlooksatthemicrofinancesysteminAfricainisolationasitexistsinaparticularcountrynationallyorpartsofacountryorsubregion(UEMOA,1993;UEMOA,2005;CEMAC,2007;Oketchetal,1997;ICEGandKRep;1999;FinMarkTrust,2003;Oketch,2006);orinmanycases,itdrawsfromsmall,nonrepresentativesamplesurveys(ILO,1992;ILO,2003;SteelandAryeetey,2003). 52. Copyright2008TheAfricanUnionCommission52Forthefirsttimeintheregion,therearetwoparallelcomprehensivesurveysofmicrofinanceinAfrica,allongoingsinceAprilandSeptember2007.ThesecondsurveywascommissionedbyWomensWorldBanking4incollaborationwithAMAF.Ofthenumeroussourcesofinformationscrutinizedforthisexercise,onlytwosurveyswerereasonablycomprehensiveincoverageandhadaregionalfocus68.TheWorldBankcarriedoutthefirstsuchsurveyin199769.ThesecondwasbyIFPRI70in1999.Inadditiontothese2surveys,therearecomprehensive10and5yearstimeseriesdataonmicrofinancefor8countriesthatfallundertheWestAfricaEconomicandMonetaryUnion(UEMOA)andanother7countriesundertheCentralAfricaStatesEconomicandMonetaryUnion(CEMAC).Otherwise,muchoftheinformationonmicrofinanceinAfricadrawsfrompartialandregionallynonrepresentativesamplesurveys.Othersourcesinvariablylackabroaderperspectiveofthemarket;eithertheyfocusontheoutreachandfinancialperformanceofparticularmicrofinanceinstitutionswithintheregionorlookatonlyoneaspectofthemarket,forexample,theiraccesstocapitalmarkets,regulation,orevolvinglinkagesandinnovationsthataccelerategrowthandoutreach71.NotableexamplesincludetheannualpublicationonoutreachbytheMicrocreditSummitCampaignandMicroBankingBulletin72,bothbasedondatafromtheMixMarketWebsite73.Thesedifficultiesnotwithstanding,itwasnecessarytohaveacomprehensivepictureofthesysteminitspresentformthroughouttheregioninordertodeveloparoadmapforthefuturegrowthofmicrofinance.Abroadregionalpictureofthesystemisimportant,notonlybecauseitfacilitatestheidentificationofgoodindustrypracticesandchallengesuponwhichchangemaybebased;italsorevealsthestrengthsandweaknessesofthesystemuponwhichapragmaticfuturevisionoftheindustrymaybebuilt.Stillfurther,tosupplementandfillthegapsinindustryinformation,severalcountrylevelnetworksofmicrofinanceinstitutionsweresurveyed.Inthisregard,anopenendedquestionnaire,whichattemptedtosolicithistoricalandrealtimeinformationontheircountrysmicrofinancesystem,wasemailedtothoseofthenetworksthathadpubliclyaccessibleelectronicmailaddresses(Table5).4SeeKlinkhamer,Madeleine,andAscroft,Mariama,(2008),InventoryandDiagnosticofMicrofinanceinAfrica,NewYork:WomensWorldBankingincollaborationwithAMAF,draftcopyJune. 53. Copyright2008TheAfricanUnionCommission53Table5CountryNetworksSurveyedforPrimaryDataCountry email address Website addressZambia amiz@zamtel.zmSenegal pamecas@arc.sn www.senegal.portailmicrofinance.orgNamibia info@jcc.com.na www.jcc-namibia.comKenya amfi@nbi.ispkenya.comUganda amfiu@infocom.co.ugEthiopia aemfi@telecom.net.et www.aemfiethiopia.orgBurundi rimburundi@gmail.com www.rimburundi.civiblog.orgBenin alafia.network@intnet.bj www.alafiamicrofin.orgCote dIvoire cpb@fasonet.bf, aisfd@fenacoopec.ci www.capaf.org/pages/partenaires/aisfd_ci.htmlMali apim@afrione.net.ml www.apim-mali.orgNiger anip@intnet.ne, crn@intnet.bjanip@intnet.ne www.capaf.org/pages/partenaires/anip-mf.htmlTogo alafiatogo@caramail.com, www.capaf.org/pages/partenaires/apimtogo.htmlZimbabwe zamfi.info@utande.co.zwThe Gambia gawfa@gamtel.gmCongo Republic apemf-congo@yahoo.fr www.apemfcongo.comMadagascar apifm@simicro.mg www.madamicrofinance.mg, www.apifm.mgGhana mfinet@ghana.comMozambique mmf-moz@tvcabo.co.mzGuinea pride.finance@eti-bull.net apim-guinea.orgBurkina Faso apimbf@cenatrin.bf, cpb@fasonet.bf www.capaf.org/pages/partanaires/APIMBF.htmlMauritania apromi@opt.mr www.capaf.org/pages/partenaires/apromi.htmlNigeria cdmr@forwa.linkserve.orgCongo Republic apemf_congo@yahoo.fr www.apemfcongo.orgSource:SEEP,2006;other 54. Copyright2008TheAfricanUnionCommission54AlongwithhelpinginfillingthegapsininformationaboutthesectorinAfrica,thequestionnairealsosoughttosolicitimportantinformationregardingtheinvolvementandimpactofvariousAUmemberstatessupportinsupportingthesector.Itwas,thus,veryhelpfulinidentifyingcaseexamplesofgoodpublicsectorpracticesandprinciplesuponwhichtheAUcouldpremiseguidelinesforthefuturedevelopmentofthesectorintheregion.Althoughjustafewofthenetworksrespondedtothisquestionnaireonlyeightofthosecontactedprovidingsomeoftheinformationsought,thiseffortalsohelpedalotinassessingtheconditionandcapacityofsuchnetworks.Finally,inadditiontothesaidsurvey,theconsultantpersonallyvisited6purposely5selectedcountriestoobtainedfirsthandinformationonthestateofmicrofinanceinthesecountries.Thelastthreecountrieswerevisitedbecauseoftheirimpressivelocalgovernmentsparticipationandinvolvementinthedevelopmentofmicrofinanceregionally.Untilnow,therehasbeennocomprehensiveaccountofthesuccessesandachievementsofAfricasmicrofinancesystemfromaregionalperspective.Theroadmap,beingthefirsttimethesectorisassessedfromasinglemarketperspective,willhopefullyalsohelpincreatingapositiveimageandrecognitionfortheindustry.5Tunisia,wheretheAfDBrelocatedtofromAbidjan,wasoneofthe6countriesvisitedbyconsultant.OthersincludedSenegalwheretheBCEAOhasmainofficeformicrofinanceregulationandmonitoringinthe8UEMOAmemberstatesandCentralAfricaRepublicwhereCEMACheadofficeisbased.Ghana,Mozambique,andZimbabweweretheothercountriesvisited:Ghanabecauseofitswelldevelopedlocalgovernmentsupporttomicrofinance,Mozambiqueforhavingjustemergedfromwarandenjoyingstableeconomicgrowth,andZimbabwetostudytheimpactofhyperinflationandpoliticallyinductedeconomicinstabilityonmicrofinance. 55. Copyright2008TheAfricanUnionCommission55III.TheStateofMicrofinanceinAfrica3.1InstitutionalDiversityandGrowthTheAfricanmicrofinancesectorisfastgrowingandbecomingincreasinglydiverse(Figure6).Inthelasttwoyearsalone,thenumberofTier1MFIsincreasedby15percent,whilethoseunderTier4,i.e.,thesmallestandyoungestdeclinedslightlybyalmostthreepercentbetween2005and2006. 56. Copyright2008TheAfricanUnionCommission56NotonlyhasthemicrofinancesysteminAfricaexpandedintermsofinstitutions,butthereisnowalsoagreaterdiversityinthetypesofinstitutionsthathaveemergedorenteredthemarket.Fromthepoolofinstitutionsidentifiedin1996,theWorldBankpickedarandomsampleof205institutionsfromAfricaformoredetailedanalysisoftheirlegalprofile,servicedeliverymethodology,genderdistributionofclients,financialproductsoffered,andthedepthandbreadthofoutreach. 57. Copyright2008TheAfricanUnionCommission57Accordingtothesurvey,alltheinstitutionsstudiedcameintoexistenceineither1992orlaterandhadexpandedtheiroutreachtothepointwheretheywereeachservingatleast1,000people.OfthemanyMFIsidentifiedbytheWorldBankin1995,just870qualifiedforfurtheranalysis,basedonthecriteria,andthusformedtheuniversalsamplingframe.Accordingtothisinventory(andassumingthatthesamplethenwasrepresentativeoftheprevailingsituationinEast,Central,andSouthernAfrica),nongovernmentalorganizations(NGOs)werethenthemoredominanttypeofserviceprovidersin1995(Table6),accountingfor81.3percentofalltheinstitutionssurveyed.Table6SampleDistributionofMFIsin1995Region Number of MFIs %ShareEast, Central, and Southern Africa 134 17.6East Asia & Pacific 122 16.1Western & Central Africa 124 16.3Middle East & North Africa 30 3.9Europe & Central Asia 24 3.2South Asia 98 12.9Latin America & Caribbean 362 47.6Total 760 100Source:AdaptedbyAuthorFinancialcooperativesorcreditunionsaccountedfor12.5percent,whilejust6.3percentoftheMFIswereretailbanksventuringintomicrofinance.Some11yearslater,however,theglobalcompositionofmicrofinanceinstitutionsrevealsmajorchangesthathaveoccurredsincethen,includingtheentryandevolutionofcompletelynewplayersintheprovisionofmicrofinance.Theanalysisbelowisbasedondatafromtwopartialbutnonethelessrandomdatabases(Table7)74andisintendedtoillustratethechanginglandscapeofmicrofinanceinstitutionsinAfricaandworldwide. 58. Copyright2008TheAfricanUnionCommission58 Table7GlobalLandscapeofMFIsin2005Charter Type Global % of Global Africa % of AfricaBank 51 11.4 7 8.0Credit Union 30 6.7 16 0.2NBFI 140 31.4 24 27.3NGO 198 44.4 39 44.3Rural Bank 26 5.8Total 446 100.0 88 100.0Source:MixMarketDatabase,2005ThetableshowsthesimilaritiesanddifferencesinthelandscapeofmicrofinanceinstitutionsgloballyandinAfrica.In2005,NGOsstilldominatedtheprovisionofmicrofinancegloballyandinAfrica,at44.4percentand44.3percentrespectively.However,relativelyfewerbanksandcreditunionsareinvolvedinmicrofinanceinAfricaascomparedtootherregions.Previously,NGOsrepresented81.3percentofallsurveyedproviders,whilecreditunionsandretailbankseachrepresented12.5percentand6.3percentrespectively.Significantly,inboththeinventoriesof1995and1999,nospecializednonbankintermediarieswereinvolvedintheprovisionofmicrofinance.However,thishaschangedduringthe8years,andthereisnowabundantevidencethatnewtypesofinstitutionsareenteringthemicrofinancemarket.Untilrecently,noruralbanksfeaturedasmicrofinanceprovidersintheearlierinventories.However,judgingbythenumbersofprovidersalone,NGOsarestilltheleadingprovidersofmicrofinance,accountingfor44.4percentofinstitutionsselfreportingtotheMicroBankingBulletineventhoughthereseemstohavebeenamorerapidgrowthinthecategoryoffinancialcooperativesandnonbankfinancialintermediaries.WiththeexceptionofBancoSolinBolivia,whichwasestablishedin1992asthefirsteverNGOtotransformintoaregulatedbank,44otherNGOshavesincefollowedsuitasofMarch2006,ofwhom7arebasedinAfrica.Globally,therearemorethan227bankingandnonbankingfinancialintermediariespresentlyengagedintheprovisionofmicrofinance(CGAP,2006). 59. Copyright2008TheAfricanUnionCommission593.2GeographicalDiversityInadditiontoruralbanks,savingsandloancompanies,andcommunitybanksmostlyfoundinGhana,Nigeria,SierraLeone,andTanzania,Africaisfastbecominghometovariedtypesofregulatedmicrofinanceinstitutions.Presently,closetoathirdofallinstitutionsinvolvedinmicrofinanceinAfricaarenonbankfinancialintermediaries.In2005,CGAPconductedadetailedanalysisof300microfinanceinstitutionsinAfrica75,whichconfirmedthechanginglandscape(Table8).Table8MFIsDiversitywithintheRegionRegion Central Africa Eastern Africa Indian Ocean Southern Africa African Total MFI type totalMFI-type No. of MFIs % No. of MFIs % No. of MFIs % No. of MFIs % No. of MFIs % No. of MFIs %Credit Union 10 56.0 4 10.0 8 88.9 2 7.1 32 48.5 56 34.0NBFI 3 17.0 23 55.0 1 11.1 18 64.3 26 39.4 71 44.0NGO 5 28.0 15 36.0 8 28.6 8 12.1 36 22.0Sample MFIs 18 100.0 42 100.0 9 100.0 28 100.0 66 100.0 163 100.0Countries 7 4 3 10 15 39Source:Lafourcadeetal,2005Apparently,asseenintable8above,newplayersexistsinallofsubregions,althoughWestandCentralAfricaseemtohaverelativelymorecreditunionsthantheotherthreesubregions.Intermsofinstitutionsinvolved,boththeIFPRIandrecentMixMarketstudyshowthatfinancialcooperativesmakeupthelargestproportionofthecreditvolumeandsavingstransactions,whilesolidaritygroupsprovidethemajorityofborrowers.However,itisthevillagebanksandotherlinkagemodeltypeofMFIsthathavehigherstaffproductivitycombinedwithabetterdepthofoutreachthanotherMFIs.3.3RegionalDistributionAfricacurrentlyhasmorethan10,648activemicrofinanceinstitutions(Table9).ThisnumberdoesnotincludeMFIsfrom6Africancountries;atthetimeofsurveyingtheseinstitutions,itwasnotpossibletogetreadilyrelevantinformationonthesituationfromLibya, 60. Copyright2008TheAfricanUnionCommission60Mauritius,GuineaBissau,SaoTomeandPrincipe,andSeychelles.Furthermore,thereportednumberofMFIsexcludesmanyurbanbasedSavingsandCreditCooperativeSocieties(SACCOS),eventhougharecentsurveyindicatesthat30percentoftheirclientelearepoor,i.e.,livebelowthepovertyline.A