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IFC and Microfinance in Africa: Building Strong Commercial Institutions

By Aftab Ahmed, Senior Manager-Microfinance, IFC

The International Finance Corporation (IFC)-the private sector arm of the World Bank Group-has $4 billion invested in various kinds of financial institutions in 88 countries: including banks, leasing companies, credit rating agencies, and pension funds. IFC also has $256 million invested in 56 microfinance institutions in 38 countries, reaching more than 1.3 million clients. Institutions in Southern Europe, Central Asia, and Latin America currently comprise the lion's share of this portfolio, but Africa is a growing emphasis as well.

Why Africa?
We agree with what Tony Blair said in launching the Commission on Africa report last month-that Africa's poverty and the resulting human tragedy are "the fundamental moral challenge of our time." All of us in the development community really need to look hard at what we do best and how we can help Africa overcome its struggles and build a brighter future for its people.

Many other donor agencies and NGOs are there to support Africa's critical needs in health, education, governance, refugees, and other areas. At IFC, we're focused on private sector development, working through investments and technical assistance grants to help create lasting jobs in a socially and environmentally responsible manner. Microfinance is one of several ways we do this.

To date, IFC has helped build for-profit microfinance institutions in eight African countries-Angola, Benin, Chad, Democratic Republic of Congo, Ghana, Kenya, Mozambique, and Nigeria-as part of its commitment to demonstrating to others in the business community that microfinance is a viable business, one that makes sense from both a commercial and social perspective.

Why Microfinance?
While entrepreneurs may not be as prominent in Africa as in other regions, we should never overlook their potential. These are people who see opportunities that others miss, then put everything they've got into seizing them: planning new businesses, investing in them, hiring people, and managing the resulting growth.

Africa has remarkable entrepreneurs that need support at every level-microenterprises, small and medium enterprises, and big business. In a lot of ways they're the future of the continent, and one thing they all share is a need for financing. So one of the ways we can help is by working to build strong, competitive, well-regulated financial sectors that give these entrepreneurs that financing. To us, microfinance fits that bill, as do our other projects with larger financial institutions in Africa. It all comes down to building strong, lasting institutions: creating new ones with the financial, staffing, and management resources needed for long-term success when we need to, and strengthening existing ones when we can.

IFC is very committed to mainstreaming microfinance into the larger financial landscape in order to make financial markets work for the poor. We come in as both an investor and advisor, helping microfinance sponsors launch new commercial institutions or convert existing ones from nonprofits to for-profit, regulated financial institutions, maintaining strong social missions in either case.

Converting NGO microcredit programs into banks
IFC focuses on these conversions because it's only by weaning off donor dependency and adopting a commercial orientation that these microfinance institutions-MFIs-can really attract the capital and savings base they need to scale up their micro-loan portfolios and start meeting all the demand out there. It's the best way to help them make a bigger impact in poverty reduction.

IFC's Africa Portfolio
IFC's emphasis has always been on creating capacity on the ground for sustainable institutional credit delivery. To get there, the initial thrust of our investment program was on equity investment to create new MFIs in the private sector. Given that under our ground rules IFC cannot be a majority or largest shareholder, our investment in individual institutions remains small and does not reflect the effort we've put into creating new MFIs.

The aggregate amount of IFC's Africa portfolio not huge, but it's getting some good results. Today we've got about $10 million invested directly in African MFIs and are also managing related technical assistance grants covering essential management support to them. This is money we're putting at risk, seeking a balance of development impact and financial returns, so you wouldn't necessarily expect us to provide the kind of volumes a bilateral donor working exclusively through grants would do. Still, we're actively building up this business, working in a lot of high-risk markets and looking for proven formulas that can be applied widely.

In the last year, for example, we've assisted in the launch of new commercial MFIs in Angola and the Democratic Republic of Congo. It is in just these kinds of post-conflict economies where our microfinance work can have the greatest impact-in situations where people are just starting to rebuild their lives after having been displaced and where so much normal business activity has been disrupted, there is enormous demand for reliable delivery of small-scale financial services, and few if any large banks are willing to provide it. Commercial microfinance can fill that void in ways that are both profitable and socially beneficial.

The Private Sector-based Model in Angola, the DRC, and Beyond
Angola has not been peaceful for very long, and in parts of the Democratic Republic of Congo war is still being waged. Few other microfinance organizations are active in these countries. The private sector-based model allows us to be involved in these countries through our long-standing partnership with the German financial sector consulting firm IPC, which is the lead sponsor of a $125 million global holding company of microfinance institutions called ProCredit that we have invested in. They have a very effective model. Each time they target a new country, they raise about $5 million in investment capital from development finance institutions such as ours, plus about $2 million more in technical assistance grants for management support. Then they go in and start a new commercial MFI that is usually in strong financial shape and able to stand on its own feet with no further donor support within three years. They actually prefer to do this in high-risk, post-conflict situations where few others reliable banks operate and the demand is enormous. In Kosovo, for example, we went in with them just after the fighting stopped in 1999. Today the ProCredit Bank there has a $128 million loan portfolio and 15 branches across Kosovo. It's making a good profit, and serving a vital social mission.

We started working with IPC in Africa in 2000 with the launch of their bank in Mozambique, which is now the market leader there with a $6.3 million portfolio. The systems they have in place to transfer capital and management practices from one bank to another, just as, say, a Citibank or HSBC would, is what allows them to move so fast. The Angola MFI only opened last year and so far doesn't have much competition from either NGOs or banks. The Congo institution will open as soon as some licensing issues are resolved, initially just in Kinshasa, but expanding as opportunities arise.

We favor these larger wholesale initiatives that combine investment and technical assistance grants for other African countries as well. They're more efficient for us than working one transaction at a time with individual banks. So in Kenya, for example, we have investments in the two leading commercial MFIs, K-Rep Bank and Equity Building Society, via other funds we support, ShoreCap and AfriCap. We've also supported ACCION Investments in Microfinance, SPC, managed by ACCION International, which will soon be opening the first commercial MFI in Nigeria and is also helping convert the Ugandan Microfinance Union (UMU) into a commercial operation.

The Ugandan case is especially interesting in terms of how adopting socially responsible, for-profit status is the key to scaling up. Since it incorporated as a private company and started receiving management advisory services from ACCION in 2002, UMU's loan portfolio has risen from about $1 million to more than $10 million and remained very healthy. To help them reach the next level, we're preparing a new transaction, a partial credit guarantee that would enable UMU to get a five-year, $1.3 million-equivalent Ugandan shilling loan from a local bank. That debt financing, along with new equity it will get in a few months when it becomes a deposit-taking institution in a few months, should make a major difference. Within three years, we expect UMU to double its loan portfolio again to $20 million, ramping up from 50,000 to almost 87,000 active borrowers while also taking deposits from 150,000 clients.

In conclusion, IFC's approach here is the same as in other parts of the developing world: building strong commercial institutions that will be stable and long-lasting, with plenty of growth capacity and the ability to set a demonstration effect for others to follow. That's it in a nutshell, and we're always interested in talking to people with good ideas. They can contact me at Africa is a real priority for us, and needs to be approached from many different angles. Microfinance is a very important part of the larger development equation for the region.

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The United Nations Capital Development Fund (UNCDF) is a UN organization mandated by the UN General Assembly and its Executive Board to provide capital assistance first and foremost to the Least Developed Countries (LDCs). UNCDF invests in LDCs in order to support their efforts to reduce poverty and achieve the Millennium Development Goals, especially in its two main product lines - Micro finance and Local Development. UNCDF is part of the UNDP-group and hosts the UN Advisors Group on Inclusive Financial Sectors.
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