African microfinance risks survey
Tuesday, 01 Sep 2009
In the 30 or 40 years since microfinance in its modern iteration was born, it has undergone a palpable evolution. What began as a predominantly sub-continental industry - of non-profits providing microloans to the poorest women - has spread the world over. It has become peer-to-peer, securitised and tied to global capital markets. It has expanded from microcredit to micro-insurance and enterprise and livelihood development. It has seen IPOs raising nine-figure sums. And it has spread to central and Latin America, southeast Asia, eastern Europe and - of course - Africa. Non-profit NGOs will continue to play their role, but many believe commercial microfinance is key to poverty alleviation in Africa.
The past two years have seen scarcely foreseeable shocks spread from financial markets to the broader macroeconomy. In an effort to tap deeper sources of funding, microfinance has tethered itself to mainstream capital markets in recent years. That trend, however, has left it more vulnerable to the exigencies of the global economy. Whether African microfinance in particular survives will depend on how all players adapt to a very new environment.
Counting the crisis
The threats to microfinance have changed. According to the Microfinance Banana Skins survey of risk, which interviews practitioners, investors and commentators from 82 countries across Africa and elsewhere to ascertain how experts perceive the risks facing the for-profit microfinance sector, with assets of at least US $5 million, over the medium term, the crisis has taken over everything. Respondents assessed the perceived risks in the sector in the coming years - and the results turned the previous year’s findings (from a survey conducted in August 2007) upside down.
In the first survey, the fear was of "poor management quality", "corporate governance" and "inappropriate regulation". A year or so later, this has been transplanted by "credit risk", "liquidity" and "macroeconomic trends" (see table, below).
The results were broken down by respondent type and region. African respondents ranked the risks facing microfinance as follows: African respondents consisted mainly of practitioners and NGOs. Notably, the African response was very different from the rest, focusing strongly on institutional issues, particularly weaknesses in management, governance and staffing. Economic crisis issues took second place, though they were seen as fast-rising, particularly liquidity and credit risk. A rising concern was the threat to funding and refinancing. There was concern that the crisis would cause weaker microfinance institutions (MFIs) to fail and damage confidence in the sector as a whole.
"Lines of credit available to microfinance banks have become almost non-existent and the larger commercial banks are chasing the same savings deposits as microfinance banks," says Olubunmi Lawson, MD of Accion Microfinance Bank in Nigeria, of the crisis.
Experts with experience raising significant capital for African MFIs are cautious.
"There are many microfinance initiatives around Africa, but few have the potential to succeed," says Andreas Ullsten at Sweden’s EFG Bank and Nordic Microcap.
Currently 1,200 MFIs report to the Microfinance Information eXchange (MIX), boasting 64m borrowers and 33.5m savers between them, and 25% asset growth a year.
"One of the problems facing the industry is legislative - governments don’t recognise the need to accommodate external funds from the middle and upper-class public to be lent to MFIs - a need which exists to top up financing because savings do not satisfy the demand for borrowing," say Ullsten, who is agnostic about the future. "This is hampering the growth of and ability of MFIs to offer services to more people, and may have a long-term effect for African MFIs. They can only expand if members trust that they are going to be there and will be able to lend when needed. African MFIs, in effect, have to clear big hurdles to demonstrate they’re not just going to run out of cash."
Rosalind Copisarow, a former banker and microfinance practitioner who now specialises in applied microfinance and enterprise development, sees another angle. "While an increasing efficiency in the top end of the African microfinance market from new commercial entrants is very good news for customers, we need to remember that the majority of the unbanked population 30 years ago are still unbanked, and encourage the microfinance industry to keep innovating downwards. Such innovations need to recognise that the struggles people have go beyond credit and especially need to include methods of opening up new markets for them."
Pilot success
These innovations are happening. Nairobi is home to Jamii Bora Trust (JBT), east Africa’s largest MFI. With almost 90 branches across Kenya and 250,000 members, JBT has become central to many poor people’s lives. Set up by a Swede, Ingrid Munro, in 1999, she began by lending to 50 beggars. A decade later, JBT has built a pilot town - "Kaputiei" - for 2,000 families outside Nairobi. Members who have taken and repaid a loan can open a housing account - saving a small amount each week to put together the deposit on a real house in a community which can thrive. For many in Kibera and Mathare, Nairobi’s city-sized slums, this is their greatest dream.
The case of JBT brings into focus perhaps the biggest problem facing African microfinance: sustainability. Ingrid Munro is adored by many JBT members, and the organisation provides alcohol and drug counselling, relief funds, tuition and health insurance. Without doubt, JBT has improved the lives of tens of thousands of Kenyans, lifting many out of poverty and creating microenterprises. What is not clear, though, is what happens when she moves on, or what happens if foreign philanthropic interest dries up, or if the global economic crisis has yet to reach its nadir and capital markets cannot free up credit. It is, in other words, unclear how sustainable microfinance in Africa is.
For Muhammad Yunus - the father of modern microfinance interviewed in this issue on page 32, sustainability is also key. He observes that Grameen has yet to encounter a problem for which it cannot cover the cost. But he accepts the premise that there is some problem with African microfinance.
"Perhaps [the problem] has something to do with the application," he says. To improve this application he argues for two things. "Either you need to know how to do it, or you knew it but you couldn’t do it because of hurdles around you. There are some good programmes in South Africa but they cannot grow."
Noting that many of these programmes amount to barely $100,000, Yunus identifies the obstacle: "They cannot take deposits, so funding becomes the problem."
This is a sentiment echoed in the Banana Skins survey: those MFIs tied to global capital markets for their financing will suffer liquidity problems far greater than deposit-taking MFIs. "Take deposits or die," says one respondent from Uganda. "A savings-and- loan model is the most sustainable of all."
Despite these very real issues, there is much about which to be excited. Like Nordic Microcap, increasingly there are funds specialising in microfinance equity investment. This is the commercial cutting edge of microfinance, seemingly far removed from village self-help groups, but crucial in supporting the sector across the continent.
Grassroots Capital, based in New York, manages the Gray Ghost Microfinance Fund and the Global Microfinance Equity Fund, which in July won $60m in investment from PGGM, a Dutch pensions fund manager. As of mid-2009, it has made equity investments in 46 MFIs in 29 countries.
Grassroots released, in April, published its 2009 Global Economic Crisis Impact Report. Some things are clear: microfinance equity as an asset class has performed extremely well since 2000, but has never been tested by a period of global economic stress, and "though events may have negative effects on some MFIs, more flexible and resilient institutions [are expected] to survive." Some MFIs across Africa will undoubtedly fail in the near to medium term.
The picture for African microfinance is therefore mixed, and there is confusion as to its role. Too often in African countries, microfinance is hampered by onerous regulation, and decision-makers who fail to appreciate its commercial possibilities. By contrast, those who push for microfinance to be more securitised and dependent for funding on banks and funds in London or New York, will do well to remember that microfinance was intended to be social - to alleviate poverty. Punishing farmers in Malawi for the excesses of bankers in the Square Mile would feel especially cruel.
Sam Mendelson is co-author of the CSFI’s 2009 Microfinance Banana Skins Report
EXPERT INSIGHT by Wagane Diouf
Several factors have hindered the growth of microfinance in Africa. The first is a lack of regulation that enabled commercial microfinance to prosper. Secondly, the microfinance industry in Africa is driven primarily from the cooperative movement, which is effective at mobilising deposits and savings but not very effective at providing loans and catering to the growth enterprises. Thirdly, the microfinance industry in Africa is primarily rurally focused - these are corporate agricultural cooperatives that started the microfinance movement and it has taken a while for it to transpire into the urban world and finance trade and industry. Risk is high but it’s mitigated. The microfinance industry has the lowest rate of impairments of portfolio, or portfolio at risk than any other type of industry. If one looks at commercial banking, micro-financing has a better record at managing risk than the commercial bank industry.
Microfinance penetration in Africa currently is less than 10%, implying that 90% of the population is eligible to transact with the microfinance industry has not been touched. There hasn’t been a lot of information published about the portfolio quality of microfinance institutions or the track record of investment funds. It is essential that microfinance be positioned as a real industry that’s there to generate both social and financial returns. The higher the financial returns the more we can attract funds. People claim that the cost of microfinance is too high but when you look at it from the perspective of the micro-entrepreneur, it’s not the price that bothers him; it’s the access to the funds. The industry is very fragmented and viability is hampered by the lack of scale. Our purpose is to solve the scale problem by consolidation. We want to be the social investor for Africa; the irst port of call for anyone who is looking for capital or is looking to invest in social investments in Africa.
Social capital is particularly well-suited to Africa. It needs commercial funds to grow but there is also a great opportunity to do much good and have a very high social impact, and we think that we are at the centre of that industry in Africa. We believe in Africa, we want to invest in Africans and create wealth. With wealth will come development.
Wagane Diouf is managing partner of Mecene Investment
