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4.0 The Role of Governments: Microfinance in Africa - Experience and Lessons from Selected African Countries

Written by: International Monetary Fund

Article Overview: In several African countries—for example, Ghana, Guinea, Tanzania and Uganda— governments have in the past relied on state-owned banks to extend rural credit and microfinance services.

4.0 The Role of Governments: Microfinance in Africa - Experience and Lessons from Selected African Countries

(IMF Working Paper, Prepared by Anupam Basu, Rodolphe Blavy, and Murat Yulek1, September 2004)

In several African countries—for example, Ghana, Guinea, Tanzania and Uganda—
governments have in the past relied on state-owned banks to extend rural credit and
microfinance services. In most cases, these banks have incurred large losses and have had to
be restructured, recapitalized, privatized or liquidated. This experience of failed state-owned
banks has led African governments to focus on financially viable approaches to providing
microfinance and on developing regulatory and supervision frameworks that are well adapted
to supporting such an effort.

Regulatory systems in the countries reviewed have evolved through a cycle of easy entry,
weak performance, and finally tightening up of regulation and restructuring. This evolution
generated adaptive licensing and regulatory frameworks that proved conductive to the
development of the sector, but exemplified the risks associated with lax regulation of
microfinance activities. In all four countries reviewed, the failure of major institutions led to
major restructurings. The success of those restructurings was allowed by the simultaneous
strengthening of the regulatory environment and of the supervisory capacity to avoid moral
hazard problems. Box 4 presents the experience of the four African countries reviewed.

Along with the growth of the microfinance sector, governments have played a lead role in
putting in place the supporting regulatory frameworks. Approaches to designing regulation
differ widely both conceptually and in practice. In this section, we discuss issues related to
the regulatory framework in the light of the experience of the four countries covered in this
study.

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Article Tags: African countries, African governments, Anupam Basu Rodolphe Blavy, Ghana Guinea Tanzania, microfinance, microfinance sector, regulatory frameworks



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