5.0 Conclusions: Microfinance in Africa - Experience and Lessons from Selected African Countries
5.0 Conclusions: Microfinance in Africa - Experience and Lessons from Selected African Countries
In sub-Saharan Africa, there is ample evidence that the poor, particularly those in the rural
sector, value both deposit and credit facilities. The existence and growth of cooperative
banking and combined savings and credit institutions in the microfinance sector in sub-
Saharan Africa reflects the growing demand for both savings and credit facilities.
There are strong linkages between formal and informal microfinance institutions (MFIs). The
formal institutions have, in some cases, drawn on the savings mobilization methods earlier developed by traditional informal MFIs. In some cases, the former have also become bankers
to the latter.
The group-based savings cum credit institutions that are prevalent in Africa, like elsewhere,
rely on peer pressure and joint liability (rather than collateral) to ensure loan repayment. In
the case of loans to individuals, MFIs tend to rely on short maturity for repayment, high
frequency of payments, and, at times, a compulsory security deposit to encourage timely loan
repayments.
There is some evidence in Africa that MFIs, which engage in both savings mobilization and
credit extension, have faired better financially than those specializing either in deposit
collection or in lending. Those engaged in full intermediation tend to grow when they are
able to expand their resource base through deposit collection. MFI operations that depend
exclusively on funds from donors or the government, are generally constrained by a limited
resource base. Equally important, the performance of MFIs depends critically upon having
autonomy in management decisionmaking, including the setting of deposit and lending rates
with an appropriate profit-making spread; being vigilant to avoid nonperforming loans; and
building institutional capacity, addressing skill shortages.
Growing linkages between MFIs and the banking system in Africa appear to be mutually
beneficial. MFIs rely on banks for a variety of services, including deposit facilities, liquidity
management services, and, in some cases, emergency credit lines to cover cash shortfalls. For
banks, the benefits are the opportunity to expand their client base through MFIs, and to
expand their operations through the network of MFIs (including in the rural sector). The
linkages between MFIs and banks also help to strengthen the linkages more broadly between
the economic activities in the formal and informal sectors of the economy, and provide
opportunities for small entrepreneurs to graduate from micro credit to conventional bank
loans.
Donors and NGOs have played an important supportive role in the development of MFIs in
sub-Saharan Africa. Most importantly they have helped to disseminate best practices tested
internationally and regionally, build local capacity, and develop the entrepreneurial skills of
borrowers. The impact of NGOs directly involved in lending schemes has been more mixed,
mainly because of the potential adverse effects that subsidized lending by NGOs may have
on the operations of MFIs.
Finally, governments in sub-Saharan Africa play a key role in promoting the microfinance
sector by putting in place the necessary laws, regulations, and institutions for the licensing,
prudential regulation, and effective supervision of the sector. Official practices in each of
these areas vary widely across countries, reflecting the stage of evolution in the country’s
microfinance sector, institutional capacity, and skilled personnel constraints, and differences
in official approaches ranging between intensive regulation and a more “laissez-faire”
approach. In general, regulatory requirements and prudential norms applied to MFIs need to
be well adapted and flexibly designed to reflect the specific characteristics and stage of
evolution of the MFIs in a given country. It appears that these requirements and norms for
MFIs are financially less demanding than those applied to commercial banks; and newer and smaller MFIs have been subjected to less exacting licensing and regulatory requirements, and
less closely supervised than the commercial banks and larger nonbank financial institutions.
However, the growing linkages between MFIs and banks and the potential systemic effects of
distress in any segment suggest that the licensing, regulation, and close prudential
supervision of MFIs will become increasingly important.
The main constraints to developing the regulatory and prudential supervision framework are
threefold. A first set of capacity constraints relate to the lack of bookkeeping and reporting
standards, internal controls, and credit decision mechanisms at the level of the MFIs. A
second set of capacity constraints are at the level of the institutions entrusted with
supervision authority, mainly due to shortage of skilled and trained staff. Finally, the
information or database on borrowers, their credit history, and repayment records has not
kept pace with the growth of the microfinance sector.
50 Conclusions Microfinance in Africa Experience and Lessons from Selected African Countries - To learn more about this author, visit International Monetary Fund's Website.
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(IMF Working Paper, Prepared by Anupam Basu, Rodolphe Blavy, and Murat Yulek1, September 2004)
In sub-Saharan Africa, there is ample evidence that the poor, particularly those in the rural
sector, value both deposit and credit facilities. The existence and growth of cooperative
banking and combined savings and credit institutions in the microfinance sector in sub-
Saharan Africa reflects the growing demand for both savings and credit facilities.
There are strong linkages between formal and informal microfinance institutions (MFIs). The
formal institutions have, in some cases, drawn on the savings mobilization methods earlier developed by traditional informal MFIs. In some cases, the former have also become bankers
to the latter.
The group-based savings cum credit institutions that are prevalent in Africa, like elsewhere,
rely on peer pressure and joint liability (rather than collateral) to ensure loan repayment. In
the case of loans to individuals, MFIs tend to rely on short maturity for repayment, high
frequency of payments, and, at times, a compulsory security deposit to encourage timely loan
repayments.
There is some evidence in Africa that MFIs, which engage in both savings mobilization and
credit extension, have faired better financially than those specializing either in deposit
collection or in lending. Those engaged in full intermediation tend to grow when they are
able to expand their resource base through deposit collection. MFI operations that depend
exclusively on funds from donors or the government, are generally constrained by a limited
resource base. Equally important, the performance of MFIs depends critically upon having
autonomy in management decisionmaking, including the setting of deposit and lending rates
with an appropriate profit-making spread; being vigilant to avoid nonperforming loans; and
building institutional capacity, addressing skill shortages.
Growing linkages between MFIs and the banking system in Africa appear to be mutually
beneficial. MFIs rely on banks for a variety of services, including deposit facilities, liquidity
management services, and, in some cases, emergency credit lines to cover cash shortfalls. For
banks, the benefits are the opportunity to expand their client base through MFIs, and to
expand their operations through the network of MFIs (including in the rural sector). The
linkages between MFIs and banks also help to strengthen the linkages more broadly between
the economic activities in the formal and informal sectors of the economy, and provide
opportunities for small entrepreneurs to graduate from micro credit to conventional bank
loans.
Donors and NGOs have played an important supportive role in the development of MFIs in
sub-Saharan Africa. Most importantly they have helped to disseminate best practices tested
internationally and regionally, build local capacity, and develop the entrepreneurial skills of
borrowers. The impact of NGOs directly involved in lending schemes has been more mixed,
mainly because of the potential adverse effects that subsidized lending by NGOs may have
on the operations of MFIs.
Finally, governments in sub-Saharan Africa play a key role in promoting the microfinance
sector by putting in place the necessary laws, regulations, and institutions for the licensing,
prudential regulation, and effective supervision of the sector. Official practices in each of
these areas vary widely across countries, reflecting the stage of evolution in the country’s
microfinance sector, institutional capacity, and skilled personnel constraints, and differences
in official approaches ranging between intensive regulation and a more “laissez-faire”
approach. In general, regulatory requirements and prudential norms applied to MFIs need to
be well adapted and flexibly designed to reflect the specific characteristics and stage of
evolution of the MFIs in a given country. It appears that these requirements and norms for
MFIs are financially less demanding than those applied to commercial banks; and newer and smaller MFIs have been subjected to less exacting licensing and regulatory requirements, and
less closely supervised than the commercial banks and larger nonbank financial institutions.
However, the growing linkages between MFIs and banks and the potential systemic effects of
distress in any segment suggest that the licensing, regulation, and close prudential
supervision of MFIs will become increasingly important.
The main constraints to developing the regulatory and prudential supervision framework are
threefold. A first set of capacity constraints relate to the lack of bookkeeping and reporting
standards, internal controls, and credit decision mechanisms at the level of the MFIs. A
second set of capacity constraints are at the level of the institutions entrusted with
supervision authority, mainly due to shortage of skilled and trained staff. Finally, the
information or database on borrowers, their credit history, and repayment records has not
kept pace with the growth of the microfinance sector.
50 Conclusions Microfinance in Africa Experience and Lessons from Selected African Countries - To learn more about this author, visit International Monetary Fund's Website.
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