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Micro-Credit Financing and Poverty Alleviation in OIC
Challenges Facing the Microfinance Sector
in Developing Countries
Contents
 Definition and key principles
 Situation in Africa
 Key Constraints and Challenges
 Key Opportunities
 Key interventions of UNCDF in Building
Inclusive Financial Sector
2
DEFINITION

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…)
3
Key principles by CGAP




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
4
Key principles by CGAP (contn’d)



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;
5
Key principles by CGAP (contn’d)




The role of government is to enable
financial services not to provide them
directly;
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.
6
Situation in Africa



More than 50% of Africans (approximately 300 million
people) live in extreme poverty.
Only 4% of the total population in Africa has a bank account.
Number of bank deposits per person in Africa is far below
other regions.
Number of Deposits per 1,000 population
Madagascar
Venezuela
Thailand
Greece
Austria
7
0
500
1000
1500
2000
2500
3000
3500
Source: Demirguc-Kunt, Asli, World Bank, 2005.
Situation in Africa
Continued…


Only 1% of Africans have a loan or credit facility with a
formal financing institution.
Number of loans per person in Africa is far below other
regions.
Number of Loans per 1,000 population
Madagascar
Venezuela
Panama
Greece
Austria
0
100
200
300
400
500
600
700
800
900
8
Source: Demirguc-Kunt, Asli, World Bank, 2005.
Situation in Africa
Continued…
 Minimum deposits and fees required to open checking
accounts in Africa, in relation to GDP per capita, are
significantly higher than other regions.
Minimum Amount to Open Checking Accounts (%of GDP per capita)
60
50
Uganda
Malawi
40
30
Ghana
20
10
0
Bolivia
Bulgaria
9
Source: Demirguc-Kunt, Asli, World Bank, 2005.
Situation in Africa
Continued…
 Starting a business in Africa is far more expensive and takes
longer than in most other regions.
Starting a business regional comparison
Region or economy
Procedures
(number)
Duration
(days)
Cost
(% of GN per capita)
East Asia & Pacific
8.2
52.6
42.9
Europe & Central Asia
9.6
36.4
13.5
Latin Amer & Caribbean
11.4
63.0
56.2
Middle East & North Africa
10.1
45.4
64.2
OECD: High income
6.5
19.5
6.8
South Asia
7.9
35.3
40.5
Sub-Saharan Africa
11.0
63.8
215.3
10
Source: Doing Business: Benchmarking Business Regulations. World Bank/ IFC: 2005
Situation in Africa
Continued…
 Registering property is considerably more expensive than in
other regions.
Cost to register property (% of average value of property to be registered)
14
12
10
8
6
4
2
0
sub-Saharan Middle East
Africa
& North
Africa
South Asia
Latin
America &
Carib
High-income East Asia &
Europe &
OECD
Pacific
Central Asia
Source: Doing Business: Benchmarking Business Regulations. World Bank/ IFC: 2005
11
Situation in Africa
Continued…

Enforcing contracts in sub-Saharan Africa is difficult and expensive.

Micro and small enterprises in Africa generally lack access to credit
or any type of financial services.

Women and the poorest people often have no access to financial
services in Africa, particularly in rural areas.
Contract enforcement in regional comparison
Region or economy
Procedures
(number)
Duration (days)
Cost (% of debt)
East Asia & Pacific
30.0
406.8
61.7
Europe & Central Asia
29.6
393.0
17.4
Latin Amer & Caribbean
35.5
461.3
23.3
Middle East & North Africa
39.5
432.1
17.7
OECD: High income
19.5
225.7
10.6
South Asia
29.7
385.5
36.7
Sub-Saharan Africa
35.9
438.5
41.6
12
Situation in Africa
Continued…


Financial sectors in most African countries are
“under-capitalized, underdeveloped, and in need of
restructuring.”1
African financial sector depth (M2/GDP) is limited:
 Financial sector depth measures the liquidity of
an economy.
 Average depth in Africa was 32% between 1995
and 2000.2
 But individual LDCs have far less depth: e.g.
DRC: 7%; Guinea: 10%
1. Office of Finance, US Department of Commerce, International Trade Administration.
2. Christensen, Jakob, Domestic Debt Markets in sub-Saharan Africa (IMF Staff Papers, Vol 52, No 3)
Washington, D.C. : 2005.
3. CGAP, UNCDF studies.
13
Situation in Africa
Continued…



Informal sector remains dominant in
much of sub-Saharan Africa, although
MFIs are growing.3
Financial services infrastructure in
Africa lags progress in other parts of
the developed world.
Policy, Regulatory and Supervisory
Frameworks need considerable
strengthening in many African
countries.
14
Situation in Africa
 Access to domestic and international capital markets for
governments and financial service providers is very limited.
 17 of the bottom 20 countries on the Capital Access Index are in
Africa.
Average of Sub-components for 2005 Capital Access Index by Region
Equity
Market
(EM)
Bond
Market
(BM)
Alternative
Capital
(AC)
Int’l
Access
(IA)
7.02
6.76
6.23
5.48
3.11
1.31
0.18
0.75
3.15
4.79
4.06
2.51
1.97
3.12
4.34
6.12
5.41
5.00
4.28
2.90
3.21
4.51
4.57
6.61
5.01
4.90
2.63
1.95
2.66
4.48
4.61
7.18
5.03
4.65
3.67
1.23
2.06
3.94
2005
CAI
Macro-Economic
Environment
(ME)
Economic
Institutions
(IE)
Industrialized
Countries
7.02
7.23
7.11
Africa
3.12
4.85
4.22
Americas and
Caribbean
4.22
5.68
Asia
4.87
Europe
Middle East
Financial and
Banking
Institutions (FI)
15
Key Constraints and Challenges

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.
16
Key Constraints and Challenges
Continued…






Diversity of political situations and Governance
quality impacting the economic and social situation
and the MFIs:
Legal situation and difficulty to enforce the laws
Infrastructure, communication and technology
problems increase the transaction costs both for
borrowers and lenders;
Macro –economic instability (high inflation);
Not a common shared vision on the sector
development;
Wide country (DRC); low density of population
(Mauritania, Niger)
17
Key Constraints and Challenges
Continued…










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;
18
HRs capability and motivation;
Key Constraints and Challenges
Continued…






Lack of common 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;
19
Key Constraints and Challenges
Continued…







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).
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.
20
Key Constraints and Challenges
Continued…





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…
21
Key Opportunities

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.
22
Key Opportunities






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);
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
23
Key Opportunities






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…);
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»,
Lot of funds available for Africa (>200 millions
USD);
Regional initiatives to rationalize use and chanel of
funds.
24
Key Opportunities




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
25
Key interventions of UNCDF in
Building Inclusive Finance





Identify 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;
Support development of national policies, strategies
and action plans based on sector assessment;
Help build a shared vision on shaping a competitive,
efficient, and inclusive financial sector;
Assist set up of appropriate frameworks for donor
coordination and cooperation (trust funds, investment
committee, etc.);
Increase focus on developing:
 1) a conducive political, economical
environment;
 2) a conducive legal and regulatory framework;
26
Conclusion



Microfinance is not a panacea and all poor
people are not eligible to microfinance;
Donors should set up appropriate
frameworks to increase coordination at
national and regional level;
Government should pull out from direct
intervention and rather support national
dialogue and shared vision to promote an
Inclusive Financial Sector that work for the
country and the poor majority
27