Microfinance as a Strategy for Poverty Reduction in Africa

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2. Content. Microfinance: Concept and trendsPovertyMicrofinance achievementsMicrofinance and Poverty Reduction: ChallengesMicrofinance and Poverty Reduction: OpportunitiesMicrofinance and Poverty Reduction: Building Inclusive Financial SectorsConclusion. 3. Microfinance: Concept and trends (1

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Microfinance as a Strategy for Poverty Reduction in Africa

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1. 1 Microfinance as a Strategy for Poverty Reduction in Africa Fodé NDIAYE, UNCDF Microfinance Regional Unit for Southern and Eastern Africa, Regional Technical Manager [email protected] Expert Group Meeting on Poverty Eradication Bangkok, 6 – 7 July, 2005

2. 2 Content Microfinance: Concept and trends Poverty Microfinance achievements Microfinance and Poverty Reduction: Challenges Microfinance and Poverty Reduction: Opportunities Microfinance and Poverty Reduction: Building Inclusive Financial Sectors Conclusion

3. 3 Microfinance: Concept and trends (1) Microfinance: provision of diverse services (credit, savings, microinsurance, remittances, leasing…) to lower – income and poor people (level of poverty will vary from one country to another) by diverse professional financial intermediaries (NGOs, Banks, NBFI, Credit Unions…)

4. 4 Microfinance: Concept and trends (2) Key principles developed and endorsed by CGAP and further endorsed by the G8 Summit (June, 2004 Poor people need a variety of financial services not just loans; Microfinance is a powerful tool to fight poverty; Microfinance means building financial systems that serve the poor; Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor people

5. 5 Microfinance: Concept and trends (3) Microfinance is about building permanent local financial institutions; Microcredit is not always the answer. Microcredit is not the best tool for everyone or every situation; Interest rate ceilings hurt poor people by making it harder for them to get credit; The role of government is to enable financial services not to provide them directly;

6. 6 Microfinance: Concept and trends (4) Donor funds complete private capital not compete with it; The key bottleneck is the shortage of strong institutions and managers; Microfinance works best when it measures – and discloses – its performance.

7. 7 Microfinance: Concept and trends (5) Development similar to any pioneering industry 2. Story per phase: last phase also USA/ AE 3. Where are the donors? 3. What happens when it integrates?Development similar to any pioneering industry 2. Story per phase: last phase also USA/ AE 3. Where are the donors? 3. What happens when it integrates?

8. 8 Poverty (1) Multidimensional and complex status Poverty is related to no access or insufficient access to : Economic and financial means of production and property rights; Services : health, education, water… Power and equal rights : social, political, gender issues; Adequate and sustainable environment

9. 9 Poverty in Africa (2) Poverty: Poverty line in each country; Less than 1 USD$ per day; Africa lags behind for social progress: 67.3% of the LDCs; 6% of the poor people have access to financial services (with diverse situations) 50% of the population live with 1 US$ or less per day Gender – oriented poverty Rural Poverty HIV / AIDS and its effects

10. 10 Microfinance Achievements in Africa (1) Significant number of MFIs but most of them with low level of sustainability: 900 report to the Microcredit Summit 164 MFIs – the most important – report to the Microbanking Bulletin 500 MFIs belong to various network of AFMIN with 10 million members

11. 11 Microfinance Achievements in Africa (2) WAEMU Microfinance Evolution: 1993 - 2003 Institutions: 600, six times; 2,597 service points (i.e. 1 service point for 1,354 sq. km or for 28,302 inhabitants); Members: 4 million, 11.8 times with 43% of women; (32,6% households with an average of 6 inhabitants / household or 5,44% of the population); Savings: 375.6 million USD$, 10 times; Credit Outstanding balance : 372.7 million USD$, Average loan size: 126.6 USD$; Average savings balance: 495 USD$.

12. 12 Microfinance Achievements in Africa (3) Financed sectors : small trade and restaurants : 54% ; agriculture and animal husbandry : 20% Handicraft : 16% Transports : 6% Housing : 4%.

13. 13 Microfinance Achievements in Africa (4) State of the sector varies from one country to another: Political, economical environment; Legal and regulatory framework; Outreach and sustainability of the sector; Importance of informal sector; Despite some important development during the last 10 years, and some leading successful MFIs (Benin, Senegal, Kenya, Uganda..), many African Microfinance industries are still at a Start – up to expansion phase;

14. 14 Microfinance Achievements in Africa (5) Many policies or strategies to promote the Micro and SMEs development positively impacting the market; Reforms of the financial sectors; National Policy and Strategy (Tanzania, Uganda, Benin, Togo, Niger, Mali, Senegal (ongoing)…) Designing, adjusting and implementing conducive legal and regulatory framework: Tanzania, Uganda, Ghana, South Africa; WAEMU; CEMAC; Ethiopia, Madagascar, DRC… More involvement of the Central banks and the Ministries of finance; Development of MFIs Networks at national, sub regional and regional levels (AFMIN, MFN, MAIN, SAMCAF…)

15. 15 Microfinance Achievements (6) Studies in Some African Countries: Group lending methodologies in rural areas deal more with the poor; Effects on households’ living conditions more directly linked to women clients; Improvement of revenues and activities of micro – entrepreneurs (PADME IKM) Improvement of the revenues (IKM Morocco) Assets building in Guinea

16. 16 Microfinance Achievements (7) MicroSave Studies:”Access to improved financial services – access to more and better ways of turning savings into lump sums – helps poor people from sliding deeper into poverty and helps them lay foundations for their ambitions to better themselves and their families”. Self – confidence and esteem Local resource mobilisation Access to capital more affordable than Moneylenders.

17. 17 Microfinance Achievements (8) Investment in children’s education (Zambuko in Zimbabwe, Barnes) Women’s business (Cameroon) Health (Ghana) Senegal (BCEAO, CGAP)

18. 18 Microfinance Achievements (9) Three major camps (Hulme): very beneficial economic and social impacts (Holcombe, 1995; Hossain, 1988; Otero and Rhyne, 1994; Remenyi, 1991; Schuler, Hashemi and Riley, 1997). caution against such optimism and point to the negative impacts that microfinance can have (Adams and von Pischke, 1992; Buckley, 1997; Montgomery, 1996; Rogaly, 1996; Wood and Shariff, 1997). In the ‘middle’ is work that identifies beneficial impacts but argues that microfinance does not assist the poorest, as is so often claimed (Hulme and Mosley, 1996; Mosley and Hulme, 1998).

19. 19 Microfinance and poverty alleviation (1) Direct effects: Microfinance and income generating activities and entrepreneurship development; Self – employment; Building assets; Mitigating risks (savings and microinsurance); Training (management and governance of institutions)

20. 20 Microfinance and Poverty Alleviation (2) Indirect effects: Local economic development: service delivery ; income and salaries ; market and service provision. Women empowerment and social dimensions Improvement in living conditions

21. 21 Microfinance: A strategy for poverty Reduction: Constraints (1) The review of different sector evaluations and Microfinance National Strategies in Mali, Niger, Benin, Togo, Madagascar, Democratic Republic of Congo, Malawi, Sierra Leone…, particularly shows, but with differences related to the development stage of the given sector, that the constraints concern three major axes: environment, particularly with the legal and regulatory framework; financial intermediaries; borrowers.

22. 22 Microfinance: A strategy for poverty Reduction: Constraints (2) Diversity of political situations and Governance quality impacting the economic and social situation and the MFIs: Togo: political problems; DRC: still in transition with instable peace agreement; Liberia and Sierra Leone: post conflict countries Legal situation and difficulty to enforce the laws

23. 23 Microfinance: A strategy for poverty Reduction: Constraints (3) Infrastructure, communication and technology problems increase the transaction costs both for borrowers and lenders; Macro – economic instability (high inflation in DRC); Not a common shared vision on the sector development; Wide country (DRC); low density of population (Mauritania, Niger)

24. 24 Microfinance: A strategy for poverty Reduction: Constraints (4) Legal and regulatory framework WAEMU: Questions about the institutional approach which seems not to give to non C.U. a long term vision of their development; the efficiency of the supervision by the Cell within the Ministry of finance (roles of promotion and roles of supervision, political influence on the delivery of the authorization to carry out the operations);

25. 25 Microfinance: A strategy for poverty Reduction: Constraints (5) WAEMU: Linkages between fiscal exemptions and the Law; Necessity to adjust some ratios (provisioning with the international standards, specific ratios for the MFIs under convention – cadre)

26. 26 Microfinance: A strategy for poverty Reduction: Constraints (6) Loose of confidence due to the collapse of former MFIs (DRC, Guinea…); Concentration in Urban areas; Rural areas not sufficiently covered; Agriculture and rural activities important for African development; Disperse populations and remote rural areas; Transaction costs; Doubtful debts and loan portfolio quality; Pricing (interest rate…) and profit – center; Business Planning; HRs capability and motivation;

27. 27 Microfinance: A strategy for poverty Reduction: Constraints (7) Vision; Leadership, governance and management problems mainly in the C.U. (relationships between the « technicians » and « the elected bodies »); Growth management; Deficiency in the internal control system and procedures; Management Information System problem; New products: insufficiency in innovative products despite some progress;

28. 28 Microfinance: A strategy for poverty Reduction: Constraints (8) financial transparency and institutional, social and financial viability; Insufficiencies sometimes accentuated by the weakness or the absence of support services to the sector, at financial and technical levels (training, accounting and audit assistance, credit bureaus, appropriate financing mechanisms).

29. 29 Microfinance: A strategy for poverty Reduction: Constraints (9) Financial continuum: relationships with the banks are increasing yet not a right level; Banks still lack of competency to assess the risk related to MFIs for refinancing and to a broader range of clientele (direct funding) Sustainable Financial services in rural still a problem; Long term resources to sustain mid – term loans Access to financial resources: less an issue if strong MFIs to invest in.

30. 30 Microfinance: A strategy for poverty Reduction: Constraints (10) HIV / AIDS and its impact; Low level of productivity; High illiteracy rate; Psychological and social aspects; Necessity of having trained clientele with increasing and credible cost-effective investment opportunities, transaction needs, transfer, savings…

31. 31 Microfinance and Poverty Alleviation: Opportunities (1) The Millennium Development Goals (MDGs) : reduce extreme poverty and hunger; ensure primary education for all; promote gender equity and women independence; reduce infant mortality; improve maternal health; fight HIV/AIDS, malaria and other diseases; ensure a viable environment; increase development global partnership.

32. 32 Microfinance and Poverty Alleviation: Opportunities (2) CGAP Access to financial services underpins the ability of the poor to achieve the MDGs on their own terms in a sustainable way. Financial services enable the poor to increase and diversify incomes, build human, social and economic assets, and improve their lives in ways that reflect the multidimensional aspects of poverty. Evidence shows that poor people choose to invest in a wide range of assets: better nutrition, improved health, access to schooling, a better roof on their homes, and expansion of their small businesses.

33. 33 Microfinance and Poverty Alleviation: Opportunities (3) Microfinance and Development (Otero, ACCION) contribution to the fight against poverty: by facilitating poor and low income households’ access to financial services, microfinance creates conditions for sustainable access to productive capital and reinforces poor people’ dignity and their capacity to participate in economy and community; the creation of viable and sustainable institutions ensures sustainable access to financial services by poor people;

34. 34 Microfinance and Poverty Alleviation: Opportunities (4) microfinance institutions become an integral part of the financial system and extend the financial sector’s capacity to reach the populations excluded from banks and other financial systems.

35. 35 Microfinance and Poverty Alleviation: Opportunities (5) Political willingness to support the sector (PRSPs, MDGS); Development of the informal sector and the MSMEs and increasing market for MF; Increasing interest of a common shared vision for a sustainable microfinance sector (donors, investors, practitioners, TSPs, Banking systems);

36. 36 Microfinance and Poverty Alleviation: Opportunities (6) To achieve NEPAD and MDGs, level of annual economic growth >7%; Necessity of sound and inclusive financial sector; The development of MSMEs and informal sector: 60% of the economic activities; Access to capital is considered as one the bottleneck of the MSMEs

37. 37 Microfinance and Poverty Alleviation: Opportunities (7) Unemployment and informal job is increasing: Sub – African Africa: the 2nd fast – growing labour force in the world Increase of income will help strengthen the local markets and improve local demand for the economy; Some MFIs are units for governance and management training Women: majority of the clientele and relationships between women’s income and households living conditions;

38. 38 Microfinance and Poverty Alleviation: Opportunities (8) Microfinance provides financial services to the huge market considered as playing key role in development and poverty reduction Mobilization of local savings and remittances; Contribution to the integration of the local financial markets

39. 39 Microfinance and Poverty Alleviation: Opportunities (9) New players in the sector (banks, corporate finance companies…); Development and use of tools to design BP and new products (MicroSave, CIF, AFCAP…): Credit Savings and Education, learning from the informal sectors, strengthening local initiatives (MMD (Niger), FSAs (Benin, Ghana, Kenya…);

40. 40 Microfinance and Poverty Alleviation: Opportunities (10) Innovation to tackle some constraints (mobile banking, Smart cards with fingerprint, use of photos, networking with banks and postal banks for money transfer, Credit bureaus…) Regional program to support the sector with donors (BCEAO, UNCDF/UNDP « Building Inclusive financial sectors »)

41. 41 Microfinance and Poverty Alleviation: Opportunities (11) Finding good deals: investable MFIs Lot of funds available for Africa (>200 millions USD); Investors;

42. 42 The great challenge before us is to address the constraints that exclude people from full participation in the financial sector……… “…Together, we can and must build inclusive financial sectors that help people improve their lives.” Kofi Annan, 23 December 2003,press release on the International Year of Microcredit

43. 43 Microfinance and Poverty Alleviation Towards Inclusive Financial sectors (1)

44. 44 Microfinance and Poverty Alleviation: Opportunities (12) Diverse institutions providing permanent access to a wide – range of financial services for a broad range of poor and low – income households and MSEs; sustainable access to financial services to a majority of lower – income and poor people by the integration of microfinance to the mainstream financial sector Bank downscaling; MFIs upscaling

45. 45 Microfinance and Poverty Alleviation Towards Inclusive Financial sectors (2) 1. Financial Sector Assessment: a diagnosis of the financial sector all aspects relevant for the functioning and development of the microfinance sector; identifies the constraints and untapped opportunities that need to be addressed to allow for full participation of the lower segments of the market into the financial sector;

46. 46 Microfinance and Poverty Alleviation Towards Inclusive Financial sectors (3) assessment should be discussed and validated by all key stakeholders in the financial sector. 2. Development of a national policy, strategy and action plan based on the assessment: a shared vision on building a competitive, efficient, and inclusive financial sector;

47. 47 Microfinance and Poverty Alleviation Towards Inclusive Financial sectors (4) The policy, strategy and action plan is designed to put this vision into practice; The policy : agreed upon principles and roles of the actors; The strategy : “A set of Operational Objectives following a Defined Policy”: main areas that will be addressed to develop the sector;

48. 48 Microfinance and Poverty Alleviation Towards Inclusive Financial sectors (5) The action plan will address the identified constraints and take advantage of the opportunities and defines financing, implementation arrangements including impact and performance assessment.

49. 49 Microfinance and Poverty Alleviation Towards Inclusive Financial sectors (6) 3) the “professionalism” of the sector: Strengthening the MFIs’ capacity; Strengthening the support services (like funding mechanisms, audit and legal services, networks, training facilities, credit bureaus, etc.) 4) other environmental factors preventing the financial services to become a stable, permanent and unsubsidized integral part of the formal financial system.

50. 50 Microfinance and Poverty Alleviation Towards Inclusive Financial sectors (7) Progress reviews to be carried out to assess the implementation process and recommend adjustments. the opportunity of the Year of Microcredit; the Blue book.

51. 51 Microfinance and Poverty Alleviation Towards Inclusive Financial sectors (8) 3. Implementation of the action plan: The action plan focuses on developing: 1) a conducive political, economical environment; 2) a conducive legal and regulatory framework;

52. 52 Conclusion Microfinance is not a panacea and all poor people are not concerned by microfinance; UNCDF/UNDP has a joint initiative to build inclusive financial sectors in Africa: UNIFI – Africa: United Nations Initiative for Financial Inclusion 42.3 Million USD: 2004 – 2010 with the aim to mobilize 100 million USD from the private sector.

53. 53 Selected Bibliography and Website for the Presentation Year of Microcredit: www.yearofmicrocredit.org “Microfinance, Poverty Reduction and the Millennium Development Goals” Peter Kooi (SUM/UNCDF) (2003) : in… UNDP Poverty Reduction : The Practice Newsletter Jan 03. « Bringing Back Development into Microfinance », Maria OTERO, ACCION, 1999 L’approche sectorielle, note conceptuelle, Fodé NDIAYE et Makarimi ADECHOUBOU; Le cadre légal et réglementaire pour la microfinance et rôles du FENU: Note conceptuelle: Fodé NDIAYE et Makarimi ADECHOUBOU; Pourquoi une réglementation spécifique pour la microfinance? Fodé NDIAYE, 2004

54. 54 Selected Bibliography and Website for the Presentation CGAP website and links: www.cgap.org; Microfinance Bulletin and Mix: www.mixmbb.org; www.mixmarket.org BCEAO: www.bceao.int; BEAC: Cadre légal et réglementaire GTZ: Regulatory Framework: A Comparison of 11 Countries Worldwide; Specific Central Banks sites; CGAP: Guiding principles on Regulation and Supervision of Microfinance; UNCDF: Building Inclusive Financial Sectors: www.uncdf.org

55. 55 Selected Bibliography and Website for the Presentation CGAP and UNCDF Microfinance Donor Training Handbook; Small and Microenterprise Finance: Guiding Principles for Selecting and Supporting Intermediaries ADME site: www.padmebenin.org K – Rep site: www.k-rep.org The Worldbank: www.theworldbank.org IFAD: www.ifad.org MicroSave: www.microsave.org Accion: www.accion.org

56. 56 Thank you Q&A

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