The African Landscape by Microfinance Insights

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Vol. 9, Nov/Dec 2008

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Interview James Mwangi, Equity Bank Commentary Gaining the Competitive Advantage Survey On Microfinance in Africa Commercialization Microfinance and Capital Markets in Africa

The African Landscape:

Ripe for Entrepreneurship, Innovation and Investment

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12 Perspectives

Off the Streets and into a “Good Family” Chevenee Reavis

Entrepreneurship

Cover Story

Transparency

Microfinance in Africa: Harnessing the Potential of a Continent

Creating Credit Bureaus to Penetrate a Cash Culture, Expand Credit Jerilene Creado

Growth in Africa is at an all-time high driven by investment, high commodity prices and reduction in debt. But a large number of people still lack financial services. We take a look at how entrepreneurship, innovation and investment happening today can change all this.

Interview

Women Entrepreneurs: Transforming Necessity Into Opportunity Michael Strong

Commercialization

Regular Features News Board

Commentary

Gaining the Competitive Advantage Wagane Diouf

Global Viewpoints

Centerfold

Resources

Perspectives on Africa from Across the Globe Mapping Africa Selected Africa Readings, and Recommended Events

Survey

Books

Last Word

Microfinance in Africa: Growth Rates, Funding Products and Regulation Book Excerpt and Book Review The World’s Other Economic Crisis Eric Thurman

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Intersection of Microfinance and Capital Markets in Africa Wessel Smit

Crisis

The Silent Tsunami: The Role of Microfinance in the Global Food Crisis Josette Sheeran

A Losing Battle: Zimbabwean Microfinance in the Face of Hyperinflation Jannine Versi

Products

Trends

Indicators on Microfinance Operations in Africa

Equitable Finance: Interview with James Mwangi Helen Gale

Housing Microfinance in Africa: State of the Industry Bhakti Micrchandani, Stephanie Poole, Vishaka Parekh

Funeral Insurance in South Africa Vibha Mehta

Donors

The Cradle of Mankind: Helping Microfinance Boom in Ethiopia Philip Berber

nov/dec 2008

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readers speak Full Results of our Sept/Oct 2008 Technology and Microfinance Survey now available at www.microfinanceinsights.com

Technology and Microfinance: Making the Right Connections Survey Report Sept/Oct 2008 Published by Microfinance Insights

ERRATA for Microfinance Insights Vol. 8, Sept/Oct 2008 Issue “It was exciting to meet you at the Microinsurance conference. The whole conference was well-organized and fruitful for all who attended. Hoping for more advanced events from Microfinance Insights.”

M.R. Prajapati, Participant at the “Indian Microinsurance:What Works?” event and subscriber to Microfinance Insights.

While we spend a lot of time trying to ensure t he accuracy of our publication, an error escaped our attention in the Sept/Oct 2008 issue.

In the commentary by James Dailey on page 10-11, we referred to “Crane Software selling Banker’s Realm across East Africa.” This was incorrect. To clarify, Bankers Realm is a core banking system for retail and corporate banks. Bankers Realm MFO is a core microfinance software. Both products (and several others) are produced by Craft Silicon, a company based in Kenya, with partners in several regions around the world. In the trends section on page 50-51, we omitted acknowledging a personal interview with Kartikay Rai, Senior Associate, IntelleCash.

“I have just received the recent copy of Microfinance Insights. It makes an interesting read, the content is very rich, especially in the area of M-banking. Keep raising the stake.”

Our apologies for the errors.

“I was very happy to get a copy of Microfinance Insights (at the MFNT Summit 2008). It is really an essential reading for my microfinance students to stay up to date.”

? Microfinance + ____________ = Better Development

Edet Akpan, Target Microfinance Bank, Nigeria

Arvind Ashta Professor, Finance, Control and Law, Burgundy School of Business Dijon, France

“As a banker currently engaged with the IT Department of the bank, I find the contents of your latest issue totally innovative and interesting. With big banks falling over high volume businesses, it’s going to be back to basics and the century will belong to microfinance lending. I am subscribing to your magazine right away. Thanks and keep up the spirit.” Hariharan Narayanan Deputy Manager (IT) Andhra Bank, Guntur, India

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A. Water B. Energy C. Health D. Carbon credits E. Education F. All of the above

s our Don’t mis on next issue ce Plus n Microfina ! t to find ou

Vol. 10, Jan/Feb 2009

From the Editor

Why Africa? TM

Dear Reader, Vol. 7, July 2008

Managing Editor Lindsay Clinton Editorial Team Aparajita Agrawal, Jerilene Creado, Ranjit Koshi, Vibha Mehta Advisory Board Vineet Rai, Wim van der Beek Cover & Page Design ToonPillz For editorial, contributions, subscriptions, advertisements and other queries, please contact:

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The views and opinions expressed herein by authors are not necessarily those of Microfinance Insights magazine, its Staff or its Editor, and they assume no responsibility for them.

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A few years ago, I got the chance to travel across Senegal with a friend. We bumbled along from Dakar to Thies, Thies to Tambacounda, Tambacounda to Koumpentoum, Koumpentoum to Kedougo—an eastward trek through increasingly small towns on the way to the border of where Senegal meets Guinea. It required transport by car, then bike (with no brakes), and finally a half day hike on foot. When we reached our destination at the top of a mountain, Fongolimbi, we bathed by the village water pump, ate red bean sandwiches, and enjoyed a skyline unpolluted by light. And, we found what we had heard about: pure, unadulterated shea butter, made from the karite plant. We spent a mellow day in the village—no electricity, no roads—and went back the way we came a morning later. Before we left, we bought shea butter packed into old plastic bottles from the local women. I learned later that some of the women are part of a revolving savings fund—a basic form of microfinance. At the time, I didn’t think much about it—this was long before Yunus or Krugman had received their Nobels, reminding us about the power of microfinance and the interconnectedness of world economies. But, while working on this issue, those women have been hard to forget. They are representative of many of the borrowers in Africa: extremely remote, undeniably poor, with limited access to markets, but possessing an entrepreneurial spirit and a good product. When our team discussed the idea of doing an issue on Africa, I assumed everyone would be eager to see the final product. But, a few weeks ago, a colleague and major proponent of the magazine asked me, with a tilt to his head, “Why Africa? I mean, do you think people are interested?” Indeed. We do. Over 50 countries. 300 million in need of microfinance. 20 large MFIs. Hundreds of small ones. Hundreds of millions of dollars invested. Women like those in Fongolimbi. MFIs like Equity Bank and Jamii Bora. The facts are compelling, and the backdrop is dramatic: hyperinflation, soaring food prices, evolving regulation, often unstable environments. There is a lot of work to be done, and a lot of ground to cover. But why would we cover it? Microfinance Insights publishes from Mumbai, and we are produced by an India-based company called Intellecap. But, our founders straddle the US and India. Our employees are housed in Asia and Europe. Our investors sit in Europe and the Middle East. And our core competencies are quickly spreading from India to Pakistan, Vietnam, Ghana, the US, and beyond. As a company, we are more global than ever, and as a magazine we want to ensure that we push an international agenda. So we turned to Africa. As we worked on this issue, we realized that it is a bear to try to cover an expansive landmass in one fell swoop—think of all the Fongolimbis with a story to tell. A finite page count restricts us from presenting every perspective we would like to tell. We hope that what we have covered will prompt you to dig deeper. It did for us. During the course of constructing this issue, we decided we wanted to take it one step further by bringing it to life. Accordingly, on November 20th in Nairobi, we will convene several of this issue’s commentators for a launch event and panel discussion about the future of entrepreneurship, technology and regulation. If you’re in the area, drop us a line or swing by our event. There is no better forum to experience the publication. For us, it completes a full circle and creates a strong feedback loop critical to the success of the magazine. We hope it will lead to new stories for future issues! To close, we hope this issue won’t leave you asking “Why Africa?” Rather, we hope that in some small way, we have done our part to inform and pique your interest in a continent that is ripe for investment, entrepreneurship and innovation. Enjoy the issue,

Lindsay Clinton Managing Editor

www.microfinanceinsights.com

nov/dec 2008

microfinance insights

NEWS BOARD Development Bank of Namibia Launches Microfinance Support Framework to Provide Capital Loans to MFIs

October 28, 2008 - The Development Bank of Namibia (DBN) launched the Microfinance Support Framework to provide capital loans to organizations that support development through low-cost microloans. The Framework will provide US$4m to credible MFIs to extend their products countrywide. The loans will serve to develop microenterprise, basic housing, improvement of rural communal and small-scale farming, community and youth organizations, and allied training and support. The Framework aims to enhance the extent and the reach of microlending by presenting an additional source of capital.

PlaNet Finance, Orange Receive US$1.7m from Gates Foundation to Promote Mobile Banking in Africa, Middle East

October 27, 2008 - PlaNet Finance and Orange have jointly developed a project that will enable PlaNet Finance use its existing mobile phone platform and infrastructure to provide microfinance clients with enhanced access to banking services. By enabling poor people to use their mobile phones to process financial transactions, the Mobile Banking Project will reduce the cost of these transactions for MFIs. The project has received a US$1.7m grant from the Bill & Melinda Gates Foundation. The grant will enable PlaNet Finance and Orange to implement and evaluate its mobile banking platform and solutions for MFIs in Senegal, and then expand this program to Jordan, Egypt and Ivory Coast.

Global Financial Crisis Leading to Drying Up of Funds, Higher Interest Rates for African MFIs

October 24, 2008 - Amid the growing global financial crisis, some of Africa’s poorest nations are struggling to lower earlier projections of economic growth by focusing on how to satisfy the basic day-to-day needs of their citizens. The Microcredit Summit Campaign’s recent survey revealed that MFIs borrowing from banks are facing higher interest rates and in some cases,

microfinance insights

drying up funds. Sam Daley-Harris, the Campaign’s Director said that tightening pressures were being felt even in low-end borrowing circles and that such small but essential programs that can make a difference for Africans facing dire poverty are also feeling the effects of the global financial pinch. Daley-Harris urges African leaders to act quickly to hold their rising bank costs and interest rates and to make sure that adequate investment flows in the credit market continue to be available to low-end borrowers.

Microfinance Investor Institutions Sign the Client Protection Principles

October 22, 2008 – Thirty four microfinance investor institutions have signed on to the Client Protection Principles, a microfinance industry-wide initiative that encourages providers to ensure that low-income clients are treated fairly and protected from potentially harmful financial products. The Principles draw from the path-breaking work of microfinance institutions, international networks and national microfinance associations to develop pro-consumer codes of conduct and practices. These early signatories have committed to a process to translate the Principles into standards, policies, and practices appropriate for different types of microfinance clients, products, providers, and country contexts.

New Online Donation Model to Enable Direct Funding to Poor Entrepreneurs

October 21, 2008 - Opportunity International launched OptINnowTM, a new initiative that connects people who will enable the working poor around the world in receiving small business loans to lift them out of poverty. Inspired by Kiva.org, the primary difference between the two sites is that on Kiva, loans made by people are repaid to them, whereas on OptINnowTM, people make tax-deductible charitable donations that are used to fund a loan.

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IFC Allocates Part of US$2bn Bailout Package to Help Latin American MFIs Cope with Financial Crisis

October 14, 2008 - IFC announced a US$2bn available for its Latin American customers and SMEs to cope with the ongoing financial crisis. Under the plan, IFC will provide up to US$500m for microfinance and loans to Latin American SMEs through regional banks and MFIs that cater to this sector.

Andean Countries Boast Best Business Climate for Microfinance

October 10, 2008 – According to the results revealed by the Microscope index, Peru has the best business conditions for microfinance in Latin America and the Caribbean. The Microscope index presented by the Inter-American Development Bank (IDB), Corporación Andina de Fomento (CAF) and the Economist Intelligence Unit (EIU), consists of 13 criteria that gauge the effectiveness of regulatory frameworks for microfinance, the degree of development of MFIs and the investment climate in 20 countries in the region.

New Microfinance Fund for Israeli Jews and Arabs to Provide Loans Compliant with Tzdaka in Judaism and Zakat in Islam October 9, 2008 - A new NGO the Jerusalem Interest-free Microfinance Fund (JIMF) has initiated a scheme to give interest-free loans to help Jerusalem’s poor start their own businesses. The NGO borrows the models from the laws in Judaism and Islam – including prohibitions to accept interest-

NEWS BOARD based loans. Part of the JIMF’s service will be business training to the borrower, giving the loan extra value, while loan repayment will be enforced by either the Jewish courts or by the elders in the Muslim communities, depending on the recipient.

MICROFIX to Provide Local Currency Hedging for MFIs

October 6, 2008 - MICROFIX, a new fund initiated by PlaNIS and Corporate Connect, will enable MFIs to take away the local currency risk on their existing funding of hard currency loans. MICROFIX will also enable international MFIs to offer direct loans in local currencies to their clients. Backed by technical assistance from BNP Paribas, FMO, PlaNet Finance and TCX, MICROFIX is expected to be operational in early 2009.

CGAP 2008 MIV Survey Indicates High Growth, Improving Returns for Microfinance Funds

October 3, 2008 – CGAP’s 2008 MIV survey looked at evolving opportunities in microfinance for the investor community. The survey identified 91 funds with US$5.4bn in assets under management (AUM). The survey highlights that 75% of these investments are in fixed income, but equity investments are growing rapidly. In 2007, equity investments grew by 95% and saw the creation of seven new equity funds Investments are primarily directed towards Eastern Europe and Central Asia (45%) and Latin America (32%) although South Asia and Africa are on the rise (+ 164% and 119% respectively). The survey also reveals a surging appetite among institutional investors as a source for MIV funding. Their share of MIV funding jumped from 14% to 41% in just 3 years.

Grameen-Carso to Offer Microcredit at Lower Interest Rates in Mexico September 29, 2008 - Grameen Trust and Fundación Carlos Slim AC have partnered to form Grameen-Carso to provide microcredit to the neediest people in Mexico. Grameen-Carso will offer microcredit lines with lower interest rates than other microcredit suppliers in Mexico. Fundación Carwww.microfinanceinsights.com

los Slim will provide initial assets of US$5m and guarantee another US$40m for credit lines of this strategic alliance. Grameen Trust will be the manager of this alliance.

Barclays to Invest US$20m in Community-based Financial Services in Africa

September 26, 2008 - A new project, led by Barclays, will expand access to communitybased financial services. Barclays will invest US$20m over three years to fund microfinance schemes with Care International and Plan International. The new project will see the expansion of existing communitybased financial services, such as VSLAs, and the introduction of new programs in 10 countries across Africa, Asia and Latin America.

PepsiCo Foundation Supports Microfinance-based Water Initiative

September 25, 2008 - PepsiCo Foundation announced US$4.1m grant to WaterPartners International to strengthen its WaterCredit Initiative. The initiative uses an innovative microfinance program to increase access to safe water and improve sanitation for local communities in India. It will establish a microfinance market to enable impoverished people across India to gain better access to water through microloans.

New Microfinance Guarantee Program to Increase Availability, Reduce Cost of Microloans

September 24, 2008 - Schwab Charitable launched a microfinance guarantee program, the first of its kind, that enables donors to set aside a portion of their Charitable Gift Accounts to guarantee microfinance loans. This will allow donors to maximize their charitable impact by putting donated dollars to use, as a microfinance guarantee, while still being held in their Charitable Gift Accounts and invested for growth and future granting. The program could increase the availability and reduce the costs of microfinance loans in over 25 developing countries.

ACCION International Launches

Center for Financial Inclusion

September 18, 2008 – ACCION International launched the Center for Financial Inclusion to connect private-sector, nonprofit and academic expertise and resources to accelerate the reach and increase the quality of microfinance worldwide. Later at the Clinton Global Initiative, the Center announced a Campaign for Client Protection in Microfinance - a broad-based initiative to unite microfinance providers in commitment to the campaign standards for the appropriate treatment of low-income clients.

CGAP Launches SmartAid for Microfinance Index 2009

September 18, 2008 - CGAP’s SmartAid for Microfinance Index 2009 is the first ever effort to measure, rate, and compare how well development organizations are set up to effectively provide funding and advisory services to microfinance area. Funders that work in microfinance are invited to participate in this unique exercise. The Index comprises 10 indicators in five areas: policy/strategy, staffing, accountability, instruments, and knowledge management. It is based on self-reported information and is scored by a group of experts. In addition to receiving a score they can use as a benchmark of their own efforts over time or against the scores of other funders.

Kenya Shows Record Bank Expansion

September 5, 2008 - The number of Kenyans with bank and savings accounts tripled last year, from 3.3 million to 10.1 million. Banking industry players attribute the growth, which took place in the last 18 months, to aggressive marketing of credit, greater availability of banking facilities and the introduction of a series of new products targeting low-income groups. As a result, 27% of Kenyans now hold accounts compared with 9% a year ago. Ongoing sector reforms such as enactment of the Microfinance Act are expected to usher in more players, increase competitive pressure and broaden the range of financial services to the unbanked. n

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commentary

Wagane Diouf, Managing Director of Mecene Investment, and fund advisor to AfriCap, thinks that as larger microfinance players move into the continent, smaller local microfinance institutions will be strained. The answer, he says, is consolidation.

ver the past three decades, microfinance has grown from a small, uncertain experiment to a multi-billion dollar global industry. It has proven to be an effective, sustainable tool in the global fight against poverty, empowering local entrepreneurs and enabling economic growth from the ground up. While its informal nature makes the global microfinance market difficult to measure, experts estimate that US$20-30bn are currently on loan to more than 50 million microfinance borrowers around the globe. From 2004-2006 alone, the total loan portfolio of microfinance institutions grew by 80%, and the total assets of these institutions grew by 73%. Despite this growth, the vast majority of this potential US$250-300bn market remains unserved. Nowhere is this more true than in Sub-Saharan Africa, a region in which greater than 70% of the working population operates in the informal sector, but just 10% of the working poor currently enjoy access to financial services. African microfinance institutions have increased their assets at a nearly 50% Compound Annual Growth Rate (CAGR) in recent years, and average time to sustainability has decreased from thirteen years in the mid-eighties to about three years today. Nevertheless, African MFIs still lag behind their global peers in several respects: • Operating efficiency: While MFIs in the rest of the world have seen their operating costs decrease steadily over the past several years, their peers in Africa have not. In fact, operating cost ratios among African MFIs increased from 27% in 2004 to 33% in 2006 (compared to 23% and 19%, respectively, in the rest of the world) • Cost of capital: African MFIs typically pay higher prices for their funds than do MFIs anywhere else

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• Write-off ratio: In 2006, write-off ratios in African MFIs averaged 1.9%, compared to 0.9% in the rest of the world These differences stem from several factors, including a greater perceived risk in African countries, the relatively high cost of skilled and motivated labor, and uncommonly poor infrastructure. Primarily, though, these differences owe to the fact that the African microfinance market is newer and more fragmented than the market in Asia, Latin America, or Eastern Europe. Experience has proven that economies of scale can greatly improve the performance of microfinance institutions. Larger MFIs typically can serve more clients per staff member, develop more advanced IT systems, and significantly reduce operating costs. A 2006 MIX market survey revealed that MFIs with more than 30,000 borrowers were more than twice as operationally efficient as those with less than 10,000 borrowers. In addition, larger MFIs—especially those with global reach—are able to access capital much more cheaply than smaller, local MFIs. This is especially true in Africa, where treasury bill rates in some countries have risen above 20%. Due to the competitive advantages offered by scale, the microfinance industry has been undergoing a consolidation process for several years. Asia and Latin America have seen global microfinance networks such as ACCION, ProCredit, PlaNet Finance and FINCA aggressively grow the market. This competition has made the industry more efficient in these regions, both in terms of increasing their outreach and improving the customer value-proposition. This changing environment has forced previously “local” players such as Unitus (India) and BRAC (Bangladesh) to become larger, more efficient, and more ambitious. Successful MFIs today of-

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ten maintain regional or even global ambition, as they must continually increase effiencies to thrive in an increasingly competitive market. The consolidation process driving industry growth in Asia and Latin America is now hitting Africa as well. Indeed, all of the organizations mentioned above have made major inroads into the African microfinance market, as have additional networks such as Advans and MicroCred. Commercial banks throughout the continent are also moving into the microfinance space, driven by the market size and the potential returns as well as the beneficial social impact. Often these banks partner with existing global microfinance networks to ease the transition, such as the partnership between the African giant Ecobank and US-based ACCION International. The incoming global players have more advanced IT systems, larger operational bases, and significantly cheaper access to capital. While these developments bode well for micro-entrepreneurs, they place tremendous strain on existing local microfinance institutions. Most African countries today have one-to-three strong, well-run local MFIs profitably serving a growing client base. If the international entrants drive these local players out of business, it could limit competition and prevent consumers from accessing the potential value of the microfinance industry. It would also discourage financiallysavvy local entrepreneurs from continuing to invest in MFIs tailored to the local market—an approach that has created most of the innovation in the microfinance market throughout the past thirty years. The local MFIs with the greatest opportunity to scale are those with strong management and ambitious double-bottom line goals. While these MFIs have grown at impressive rates in recent

commentary years, the current market trends leave them with just three viable options: • Allow global networks or commercial banks to buy them out • Continue to try to do business, accepting the fact that they will become more and more marginalized • Consolidate to reduce costs, increase revenues, and compete at a global level The viability of local microfinance institutions is important to the industry’s future, but in order to remain competitive, those with the means should consolidate. By consolidating, these African MFIs would benefit in five major areas: • Shared operating costs: By sharing IT systems, marketing, product development and administration, consolidated MFIs can achieve significantly lower costs

• Lower cost of capital: While global lenders are sometimes reticent to provide low-interest loans to local African MFIs, international networks typically inspire greater confidence and can therefore access capital at cheaper rates. Between lower operating costs and cheaper capital, a consolidation scheme could lower the cost base by more than 30% • Increased revenues: Pricing optimization, market research, tailored products and bestpractice sharing will allow MFIs to provide a better value proposition to the customer and to increase its revenue base • Accelerated scaling: Access to shared services and increased capital will allow MFIs to scale at a much quicker rate, becoming profitable more quickly • Increased liquidity options: The scale and

scope of a consolidated group will provide liquidity options that would not have existed otherwise, such as a possible listing Consolidation is a natural trend in any industry, and the increased competition in the microfinance market will likely prove beneficial to the continent’s micro-entrepreneurs. Nevertheless, African microfinance institutions are at a critical juncture, as the introduction of larger players to the market threatens their very existence. To maintain a competitive edge, MFIs should anticipate industry trends and seek mutually beneficial consolidation. n

Wagane Diouf is currently Managing Director of Mecene Investment, the exclusive fund management advisor to AfriCap Microfinance Investment Company and Fintech Africa. Mecene Investment is a Private Equity Advisory Firm, established in Mauritius and operating out of Johannesburg, specializing in Socially Responsible Investments in Africa. Its flagship fund, AfriCap Microfinance Fund, provided a 15.2% IRR to investors when it dispursed its funds in 2007. Mecene recapitalized the AfriCap fund in 2007, and currently holds investments in 17 microfinance investments across 15 African Countries. Some of the well-known investments in its portfolio include: Equity Bank Limited (Kenya), Socremo Banco (Mozambique), Women’ World Banking (Ghana) and Wizzit Bank (South Africa). Wagane Diouf is a director of the following institutions; Socremo Banco (Mozambique), Wizzit Bank (South Africa), Women’s World Banking (Ghana), SUSU Microfinance Bank (Nigeria) and Ferlo (Senegal). Additional information about Mecene Investment can be found at www.mecene.com.

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cover story

Microfinance in Africa: Harnessing the Potential of a Continent

In the last fifteen years, many African economies have begun to experience higher growth rates and increases in per capita income. High commodity prices, large-scale reduction in debt, Asian investment in the continent, and economic expansion of some of the non-oil exporting countries has helped drive this growth. However, there is still an alarming number of people living below the poverty line. Bringing financial services to this part of the population could break the poverty cycle. Sarita Gupta, Vice President, Communication at Women’s World Banking describes the current microfinance landscape on the continent.

n the past 30 years, microfinance has assumed increasing importance globally as a strategy for creating employment and generating wealth for low-income people. There has been a rapid increase in the number and types of institutions offering microfinance services in Africa, ranging from non-governmental organizations, savings and credit cooperatives, to commercial banks and regulated specialized providers. Yet the microfinance industry in most African countries remains largely underdeveloped.

“…the borders between traditional microfinance and the larger financial system have started to blur and although progress is uneven, we are seeing the beginnings of microfinance being integrated into larger financial systems in Africa.” An estimated 300 million low-income Africans need microfinance services but only about 20 million currently have access. There are fewer than 20 microfinance providers (MFIs) in Africa with an outreach of 100,000 or more active clients. African MFIs primarily finance existing businesses resulting in inadequate access to credit for start-ups. Micro and small-scale manufacturing and agro-processing remain largely underdeveloped due to inappropriate technical support, financing and physical infrastructure. The apparent slow development of microfinance in Africa is further exacerbated by lack of adequate information on the extent of its provision and impact on business and employment creation. Although the expansion of microfinance in Africa certainly faces challenges, some as-

microfinance insights

tounding progress has already been made and the prospects for accelerated growth are promising. A decade ago, for example, microfinance barely existed in Ethiopia and Morocco. Of the 20 large MFIs included in Graph 1, the number of borrowers grew by one million in total. Furthermore, Africa now has some veritable microfinance giants, including two organizations – Association Al Amana in Morocco and Enda Inter-Arabe in Tunisia – that made it to Forbes Magazine’s 2007 list of the world’s top 50 microfinance institutions. Perhaps most impressively, whereas the giants in Asia became so in an overall highly favorable environment for steady growth, with relatively low inflation and a notably higher population density than other regions, those on the rise in Africa are growing

in very demanding macroeconomic contexts. A prime example is Kenya’s Equity Bank which increased its savers by 800,000 to 1.84 million clients between 2006 and 2007.

“Since women reinvest in their communities at greater rates than men – at 89 cents on the dollar versus 60 cents, respectively – a concerted focus on women is important from both a financial and a poverty alleviation perspective.” With low bank penetration and a very large informal sector, Africa is fertile ground for microfinance. In 2007, Women’s World Banking and the Africa Microfinance Action Forum, a

Graph 1: Growth in Number of Borrowers in 2007 of 20 Large MFIs

Today, each of those countries has surpassed the million client mark and is on track to achieve two million clients served by microfinance.

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cover story voluntary advocacy group of African leaders committed to the advancement of microfinance in Africa, undertook a diagnostic to evaluate the unique challenges and opportunities for microfinance in Africa from an African perspective. The diagnostic noted that the borders between traditional microfinance and the larger financial system have started to blur and that, although progress is uneven, we are seeing the beginnings of microfinance being integrated into larger financial systems in Africa. Surmountable Hurdles This is not to say, of course, that microfinance is the cure-all to end poverty in Africa, or that every country will be able to immediately replicate the success stories. But by taking stock of the obstacles and gleaning lessons from what has worked and what hasn’t, we have the opportunity to reach more of the “unbanked poor.” Among the challenges of expanding microfinance in Africa are the high costs of delivering services with poor infrastructure, regulatory and policy issues, and the need to develop institutional leadership. The high cost environment is a major constraint to the provision of financial services in Africa. Because infrastructure and communication technology remain largely underdeveloped in Africa, it is significantly more expensive for MFIs in Africa to operate compared with their peers in other developing economies. Throughout the continent, low population densities, weak and/or expensive infrastructure and high labor and provisioning costs all contribute to high operating expenses, especially in rural areas. This results in the need for economies of scale to remain competitive and responsive to client needs. Smaller MFIs in particular are at a disad-

vantage, struggling to cover the industry’s high operational costs and diversify their product offerings in order to compete with larger microfinance providers. The largest MFIs in Africa have been able to continuously refine their lending methodologies, and have become among the most productive in terms of both borrowers and savers per staff member. On the other hand, in spite of the challenges of competition, information has begun to emerge that in some markets, competition is pushing MFIs to innovate. Finally, the lack of sufficient funding compounds the challenges presented by the cost barriers.

“Safaricom’s M-Pesa service in Kenya currently transfers an average of US$2m a day, mostly in small amounts averaging US$50 per transaction. So far, the system has handled over US$476m.” One potential solution to reducing transactional costs and reaching more clients is mobile banking. Safaricom’s M-Pesa service in Kenya currently transfers an average of Sh150 million (US$2m) a day mostly in small amounts averaging Sh3,800 (US$50) per transaction. So far, the system has handled over Sh36 billion (US$476m). Only 19% of Kenyans have access to formal financial services, so mobile phone money transfer services are a welcome option to the millions who cannot afford to open and operate bank accounts. However, technological innovations in Africa pose particular challenges because mobile phone usage has lower penetration than in other developing countries. More research will need to be done to determine how technology can be optimally used to alleviate poverty, and what partnerships are required to

Growth in Borrowers (in millions)

www.microfinanceinsights.com

scale up technological solutions. Since one of the primary obstacles to an MFI’s ability to adopt mobile banking is the lack of adequate back office systems, any scaling up of m-banking will need to take into account the MIS, operational and regulatory challenges that MFIs face, and how to best address these issues. MFIs are also working on developing ways to offer other traditionally high-cost products such as housing loans and health and crop insurance. In Ethiopia, MFIs are offering pension fund administration, in Uganda, a microinsurance product is being developed in conjunction with an NGO, and in Benin, MFIs are collaborating with commercial banks to offer remittance services. Through the Regulation Lens Another challenge in Africa is policymaking and government regulations, which vary greatly by country. In many countries, the supervisory capacity of central banks, which hold the ultimate responsibility for the financial health and stability of the financial sector, is in particular need of adjustment. The countries that are able to close the microfinance demand gap most successfully will be those that improve their policy frameworks and adapt their legal and regulatory systems in line with rapidly changing industries. In short, the government regulations faced by MFIs are often ambiguous and opaque. When the rules are not clear it makes it difficult, as well as labor intensive, to create strong MFIs. This past year, WWB network member, Kenya Women’s Finance Trust (KWFT) fought for increased transparency in regulatory policy by urging government officials to approve and publish the regulations that guide Kenyan MFIs in the formalization process. WWB used its global convening power to draft an agreement with

Growth in Depositors (in millions)

nov/dec 2008

microfinance insights

cover story Kenya’s Central Bank and the Secretary of the Ministry of Finance to ensure that the needed regulations for formalization would be approved and published. The Microfinance Act of 2006 became operational on May 2, 2008 and allows MFIs that register under it to take deposits, a function that they are not currently allowed to perform. KWFT is one of two MFIs that have applied for the deposit-taking license with the aim of becoming a one-stop shop for meeting the basic financial needs of its clients. In a continent as diverse and vast as Africa, there are many regional differences, and our research has found regional differences in the prevalence of different types of MFIs and regulation. Yet across Africa there is increasing diversity in the composition of the sector – larger banks are entering microfinance, NGOs are regulating and becoming NBFIs –and these are signs of an industry maturing. Human Resources and Transparency African MFIs, similar to most, struggle with the primary condition for success, that of sound leadership. MFI and bank leaders need both the vision and the managerial capacity to find a business model that can create efficiencies in the particular context, plan for its execution, know the risks, chart a path that overcomes the major challenges and stay the course. Related to the basic need for good leadership is the issue of information and transparency, which in microfinance has emerged as a critical element in the successful growth of MFIs. Those institutions able to produce accurate and timely reports are more likely to make appropriate decisions and mobilize commercial funds. Leading MFIs in Africa also demonstrate an organizational culture that embraces change and is conducive to continuous improvements in service delivery. Yet one constraint to developing institutional leadership is the scarcity of skilled manpower at the loan officer, middle management and leadership levels; this will be compounded by the massive training needs foreseen in the coming decade. Developing women’s leadership in particular will be crucially important to delivering on the promise of microfinance. In Africa, as in many developing regions, the idea of women taking a leadership role goes against established cultural norms; yet increasing women’s representation in microfinance, and helping women

develop the leadership skills to become innovators in their sector, is key to creating a larger and better trained cadre of leaders to move microfinance forward. Women’s World Banking has responded to this challenge by creating a unique training program for women MFI managers to develop their individual leadership skills. Thus far women managers from Kenya, Uganda, Benin, Gambia and Burundi have been trained. The case for a specific focus on women, however, goes beyond the leadership level. At the client level as well, there is a compelling business case for investing in women. Since women reinvest in their communities at greater rates than men – at 89 cents on the dollar versus 60 cents, respectively – a concerted focus on women is important from both a financial and a poverty alleviation perspective. As in most developing regions, women are the mainstay of African economies. The benefits of promoting women’s economic empowerment spread beyond the individual woman to her children, family and out into the community – creating the long-term change that is needed to successfully alleviate poverty. The success story of Joyce Wafukho in Kenya highlights the social and economic potential of microfinance and demonstrates the benefits a community can reap from one woman receiving a small loan. Joyce dreamed of opening a hardware store in her small village but had no access to financial resources or assistance. Turned down for loans from local commercial banks, Joyce was

finally able to secure a loan through a WWB network member. Now the proud owner of a fully operational and stocked hardware store and lumberyard with 25 employees, Joyce was also able to build her family a new home and send her children to school. With the help of one small loan and a lot of hard work, Joyce succeeded in expanding opportunities for both her family and the community. All Joyce needed to get started was a small loan of less than US$100. Laying the Groundwork for Success As evidenced by the success of many MFIs in Africa, microfinance holds vast potential – still largely untapped – to spur social and economic change from the ground up. So what are the factors of success? The successful MFIs are able to rapidly spread their services through communities and change their economic landscapes. They have strong institutional leadership that is able to work closely with banks and government regulating institutions; together they work to develop tailored business models that are efficient, understand the market’s specific risks and provide troubleshooting options for business owners. Successful MFIs are most often larger institutions that have enough capital and infrastructure capabilities to change lending methodologies and product offerings in order to remain competitive and attentive to their clients’ needs. It is important to take steps to ensure that women like Joyce continue to benefit from microfinance. One way is by moving beyond

Largest MFIs in Africa Country

Name

Type

Outreach

Kenya

Equity Bank

Bank

1,840,000 savers

Kenya

KPOSB

POSB

1,280,000 savers

South Africa

Capitec

Bank

783,000 savers

Cote d’Ivoire

FENACOOPEC-CI

Credit union

598,000 savers

Ethiopia

ACSI

NBFI

597,000 borrowers

Uganda

Centenary Rural Development Bank

Bank

559,000 savers

Rwanda

UBPR

Credit union

533,000 savers

Burkina Faso

RCPB

Credit union

513,000 savers

Morocco

Al Amana

NGO

481,000 borrowers

Morocco

Zakoura

NGO

473,000 borrowers *2006-2007 data

microfinance insights

nov/dec 2008

cover story credit to offer insurance and savings products so that women can save to pay their children’s school fees and invest in healthcare for their families. Market research done by WWB in Benin showed that clients, mostly women, save a fixed amount each day; at the end of the month the collector receives one day’s savings as fees. However, while these informal savings work well generally, they are vulnerable to collapse if managers are corrupt, members are undisciplined, or a collective shock occurs. These savers need safe, secure places to save with access to their money when they need it. At the policy level, regulators must work with MFIs – instead of against them – to improve the

policy framework and adapt legal systems to changing banking and small business sectors. Financial assistance should be provided to small MFIs that are struggling, in order to allow continued access to financial services for communities. Assisting institutions in becoming regulated institutions will allow them to mobilize savings, the preferred method to raise capital. Additionally, African MFIs have not yet benefited from international and commercial funding - only 10% of the total Microfinance Investment Vehicle (MIV) portfolio is in Africa. Of course increased transparency will contribute towards the ultimate goal of integration with the global financial system.

Microfinance Fund Exposure to Africa Fund

Total MFI Investments (US$ million)

Percentage

in Africa

Derived Investment (US$ million)

AfriCap

13.3

100

13.3

CORDAID

63.5

11.4

Dexia

125.9

2.5

DOEN

79.1

11.9

Gray Ghost

75.0

5.3

HIVOS-Triodos

28.8

10.4

I&P

12.7

2.8

Impulse

23.8

1.2

Oikocredit

304.2

45.6

ProCredit

110.9

6.7

ResponsAbility

96.2

3.9

Triodos Fair Share

18.6

2.3

Triodos Doen

45.2

6.8

Unitus

9.5

1.4

Source: www.microcapital.org; www.mixmarket.org (compiled by Opportunity International in April 2007).

Africa’s infrastructure will need continued improvement so that access to poor, rural communities by loan officers is possible. Time and resources should be devoted to helping MFIs diversify their product offerings, implement effective marketing strategies and successfully transition from group to individual lending models. Creating strong networks is also hugely beneficial. One of the greatest benefits of being a part of a microfinance network is the exchange of knowledge among peers. Through information and experience sharing, MFIs are able to learn best practices that they can then apply to their own institutions. For example, WWB has sent Moroccan MFIs exploring the feasibility of becoming regulated institutions to Peru, and our Kenyan affiliate to the Dominican Republic. While regional networks exist on the continent, connecting local MFIs to global best practices would lead to even greater innovations, and allow for newer organizations to benefit from the expertise of already established peers. Overall, the African microfinance market offers sound prospects for accelerated growth, though this varies considerably from country to country. Some of the more vibrant markets will experience rapid growth in the coming years, while a number of smaller countries that have no significant microfinance services might have to revisit business models and sector-deepening strategies. Continued progress will need to be made at all levels – including client, retail, macro and regional. Africa’s complex situation calls for an Africadriven strategy to develop home-grown solutions rather than relying on outside aid and assistance. The significant progress that has been made thus far holds great promise for microfinance’s potential to expand to an even greater number of Africa’s poor. n www.microfinanceinsights.com

About Women’s World Banking (WWB) WWB is a global network of 54 microfinance providers and banks, working in 30 countries to bring financial products and services to low-income entrepreneurs, especially women. The network serves 11 million microentrepreneurs directly, and another 10 million indirectly through its bank partners and other regional networks. WWB is supported by an international team of experts based in New York that delivers expertise in product design and distribution, access to capital markets, and customer care and insight. For more information on WWB, please visit its website at www.womensworldbanking.org.

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1. Conversion rate: 1 Kenyan Shilling = 0.0132 United States Dollars

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microfinance insights

perspectives

Off the Streets and into a “Good Family” A Conversation with Ingrid Munro, Founder, Jamii Bora

There is no doubt that Ingrid Munro stands out from the crowd. Colleagues have called her “revolutionary,” “amazing” and “innovative.” She also happens to be a Swede with a shock of silver hair who works with some of the most destitute Kenyan women and men. Munro is the compassionate, tough founder of Jamii Bora, a nine-year-old MFI based in Nairobi, Kenya. Munro’s unique strategies have helped Jamii Bora, which means “good families” in Kiswahili, reach some of the poorest women and men in Kenya, and helped bring them off the streets and into stable housing. Chevenee Reavis, Senior Communications Manager at Unitus, helped Microfinance Insights gain access to Munro and ask some of our most pressing questions about her background, the potential for growth in microfinance in Africa, and why external evaluations of a borrower’s poverty level are not her priority.

hevenee Reavis: You are the Swedish daughter of a Christian missionary who worked in Africa for many years. What brought you to Kenya to work in housing and how did you transition from the housing sector to microfinance? Where did your inspiration come from? Ms. Munro: My dad was a missionary and medical doctor in Rhodesia [now Zimbabwe] and he brought my brothers and sisters up to have enormous respect for Africa and African culture. That is how I came to work in Africa. It’s true that my background is in housing. In the late 1980s, I was the head of the African Housing Fund. It was my job to convince governments, donors, and non-governmental organizations (NGOs) about the importance of housing for the poor. At that time, we spent a lot of time looking at practical solutions and best practices that could help people improve the housing situation. That is when we began to look at financial solutions and Grameen Bank. This was also around the same time that Dr. Muhammed Yunus was looking into housing. We saw this as a practical way for the poor to access housing. I continued to see microfinance as a practical way for people to break the cycle of poverty. In 1988, the Ford Foundation funded Dr. Yunus to come to Africa and I met him. He gave me a lot of good advice and I saw how microfinance could go beyond just housing. That is when I saw a much bigger opportunity, beyond just housing, to help reduce poverty. CR: I’ve heard people call you “revolutionary.” What about your philosophy is different from what everyone else in microfinance is doing? Ms. Munro: I think that description comes from the fact that many people say that the destitute cannot be reached with microfinance, and yet we are doing just that. Because our staff mem-

microfinance insights

bers all begin as members of Jamii Bora, they know firsthand about the challenges of poverty. Therefore, our staff and our members have a unique bond that is very strong and promotes an environment of working together to make sure Jamii Bora is relevant to them. Together, staff and members create innovations that work for them. We are for the poor, by the poor. We adapt to what is natural for our members; innovations come from them all the time. We are a movement of people, and it is our drive to get out of poverty that gives us strength.

“Together, staff and members create innovations that work for them. We are for the poor, by the poor. We adapt to what is natural for our members; innovations come from them all the time.” - Munro, Founder, Jamii Bora

CR: Since Dr. Muhammad Yunus received the Nobel Prize, there has been a swing in perception about microfinance; the public has at times thought of it as a panacea for poverty, while others have said that microfinance can do little to change economies and lift the poor out of poverty. What do you think about microfinance as a tool to alleviate poverty? Ms. Munro: To get out of the vicious cycle of poverty, people do need more than just access to finance. They also need insurance, education, healthcare, housing—all the things that can help them move up and out of this vicious cycle instead of spiraling downward. Microfinance needs to be combined with other programs to help people get out of poverty. It must also be stressed that microfinance should be about creating jobs. Many people think that microfinance is a way for one person to get a loan. Successful microfinance is when one loan leads to a business that then creates a job for themselves and

nov/dec 2008

others. One of the criticisms is that not everyone is an entrepreneur. I say that’s okay because entrepreneurs and non-entrepreneurs need one another, and together they can help more than just themselves. CR: In the last couple of years, there has been concern in the sector about “mission drift”: organizations that shift from helping the poorest to helping the “not so poor.” At the same time, other experts say that the “very poor” are too vulnerable to incur debt from a loan. What is your perspective on “targeting the poor”? How do you decide who is “poor” versus who is “very poor”? Ms. Munro: I think that this is a real issue. I think donors can play a very negative role here when they push microfinance institutions too hard to be profitable and demonstrate sustainability—interpreted entirely as financial sustainability. This measure of success often promotes dropping the very poor to appear more successful since small loans are always going to cost more to manage and administer. I think it’s important to discuss how we measure success. To us, success is to support the very poor and to assist them in climbing out of poverty. Some of them will climb very fast, while some will climb very slowly. I think that there is a very common misunderstanding that if you work with the “very poor,” the best that you can achieve is that they will be lifted just above the poverty line. But innovation, talent, and entrepreneurial skills are not just only

perspectives among those that are not poor. Sometimes you find that the very poor are more entrepreneurial than those that are better off because they have a reason to develop those skills for survival. So you can be a beggar at the bottom of any pyramid and reach the very top once you realize those talents. To us, the very poor are not just people that climb above the poverty line. They may climb above it and go further. That is what we are seeing in our organization. I’ve had some people look at a member and say that the member isn’t really “poor.” I tell them that she was a beggar when she started and is now doing very well. Some people then ask us when we will drop her. When are members not poor enough anymore to qualify? That is a question we don’t understand. We want to be there and support our members beyond the poverty line. Successful members will become mentors for those that are just starting out. We don’t take in new members that are already high up on the ladder; they have all started from scratch with us. But we don’t let members go just because they have been successful. CR: What do you think about the mixing of microfinance and capital markets? What is your stance on the growing interest from large-scale investors in making money from microfinance? Ms. Munro: Our mission is not to be profitable. Our mission is to assist our members to get out of poverty. But to be sustainable, we must cover our costs. If we relied on subsidies to cover our costs, we would go nowhere. In general, the members that are further along subsidize the members that are just starting out. So we are sustainable in that sense; we cover our costs and make a little plus so we can keep investing in the organization such as new technology, which of course helps us to reduce costs even more. Microfinance organizations are social organizations and they must stay true to that. To reach more people, grow the organization, cover costs, and be sustainable, you must subsidize new members with successful members. That is the model. CR: What do you think is truly unique about the microfinance sector in Africa versus other regions of the world? Ms. Munro: The causes of poverty are different all over the world and different challenges require different solutions. In Kenya alone, poverty is complex and varies dramatically by geography. www.microfinanceinsights.com

Therefore, the products and services we offer at Jamii Bora vary depending on where you are in Kenya and what the circumstances are. I will give you a few examples. In arid lands, the road out of poverty is water. Without access to water, people will always remain poor. Since water wells are too expensive for one family to buy, we help many families work together to combine microloans to afford a well which will change everything for them. In the more fertile lands, where there are poor landless laborers, you can’t reach them by improving the conditions for farming. They need urban or semi-urban income-earning activities to supplement their income from picking coffee or tea, which is often seasonal work. So that is how we approach the plantation workers. In fertile areas where big farms were never established, the problem is overcrowding. Overpopulation and over-farming have over time reduced the amount of land that can go around. Farms are like small urban townhouse plots and there is no way for them to survive on such small farms. Typically, the men leave their communities to earn a living in urban areas and send money home. In those areas, they need urban to semiurban income-earning activities to supplement the small farms which can barely feed them. There you need a different kind of support. So we have learned to adapt the services we offer to different types of areas. We have learned to be innovative, listen to members, and really try to understand them. We are innovative, I think, because it is the members themselves who know what their challenges are and come up with ideas for how to address them with Jamii Bora services. Because the causes of poverty are different in different areas, the solutions have to be different. CR: What role does the Kenyan government play in poverty alleviation and in microfinance in general? Ms. Munro: The government is trying with regard to microfinance, they have introduced the Microfinance Act, which requires deposit-taking institutions to comply with regulations from the Central Bank. They’ve been really trying to clean up the industry. We had a problem in the past from some very bad “pyramid schemes,” which created a bad reputation for microfinance. We believe regulations are helping clean up the sector. In that sense, we are positive about what the government has been doing. It’s not easy to get a

country out of poverty; it has to be done with the total involvement of the people themselves. CR: When you first got started, what were the greatest challenges you faced as a startup? What skills, capacity, or capital were most urgent in those first few years? What kept you up at night? Ms. Munro: When we first started nine years ago, we were just enthusiastic and didn’t have high ambitions. I would say that the first worry was at the end of the first year, around May, when we saw people having a difficult time repaying their loans. I almost panicked. And then in September, nobody was behind. After awhile, we learned that that is the way it is every year. In May-June-July, business is low and it affects even our micro-businesses. In May, it is winter here, so there are few tourists visiting Kenya and therefore very little cash coming into the country. This affects even our micro-businesses. The coffee has already been sold; Europe and North America are in summer so nobody is buying cut flowers, vegetables, and fruit, and so there is very little cash circulating in the country at this time. This is just one example of the types of things you panic about. But then you start learning and adapt to these kinds of challenges. So we realized that our members needed to have savings so they could manage the hard times, and have enough capital at the time that our micro-entrepreneurs were ready to restock their businesses, generally all around the same time. Another example is school fees. We noticed that in January, when members pay school fees at the beginning of the school year, loan payments weren’t paid well. So we decided to set up school-fee loans to help them even out the payments over the year. School-fee loans allow members to make small payments each week instead of having to pay lump sums once a year. When we looked at the reason why some members defaulted, we found that 93 percent

A woman pionts to her house at Jamii Bora’s Kaputei Town

nov/dec 2008

microfinance insights

perspectives of all defaulting members had the same problem: one of their family members was very sick and in the hospital. When this happened, members were selling everything, and then didn’t have money to repay their loans. That is when we decided to start our health insurance program as a defense against that. So everything we’ve started has been in response to a challenge that we met. Challenges haven’t stopped us; rather, they have forced us to focus on being innovative and finding ways of overcoming them. I can’t say that there haven’t been challenges that haven’t been good for us because each one has helped us develop our systems and our products and build safety nets around our members so they can manage the normal economic shocks of life. CR: How have partnerships helped support Jamii Bora? Ms. Munro: Unitus has been a strong partner of ours. Unitus came in with a very important guarantee for a US$1m loan, which we continue to have, so that was a capital injection. We took a loan from a local bank with the help of that guarantee so we could borrow in schillings, which was important to us. And Unitus also came in with some grants to boost our training program, which is now our business school. During this post-election violence, Unitus came in in a very positive way with grant support to back our disaster insurance. Our disaster insurance program was set up for one disaster at a time, not everyone being in a disaster at the same time. So when half of our members were affected by the postelection violence and used their insurance, we needed the outside support to meet their needs. Without it, it would have killed us. Because of friends like Unitus and others from all over the world who supported our disaster insurance, there was not a single member that had been exposed to the disaster who could not benefit from the disaster insurance program they were a part of. CR: Now you are one of the fastest-growing MFIs in Kenya with a goal of reaching half a million people. How do you stay small while growing big? Ms. Munro: Did I say we would stay small? We are so many now going door-to-door. The way that Jamii Bora spreads is from one person to another. For instance, when a member sees someone with a secondhand clothes business or

microfinance insights

a vegetable stand or sending their daughter to school, they ask how they did it and say that they are a member of Jamii Bora. They then want to know what Jamii Bora is and whether they can be a member. That’s how we spread throughout the country. Someone goes home to a funeral to their rural village and they are able to help out with the coffin and people ask them how they are able to manage this, at which point they tell them that they are a member of something called Jamii Bora. It doesn’t take long before two to three people get on a bus to Nairobi and come to ask if they can have Jamii Bora in their village. Nowadays, virtually every day we have delegations from different parts of the country who just collected money for a bus fare and they come and say that they want to have Jamii Bora in our villages. We tell them that if they’re serious then they should go home, mobilize some people to let us know that they’re serious, and then we pick some trainees from there; we train them to become staff from that village and then they go home and set up their branch. That’s how it spreads. We are a movement more than an institution. Every branch we set up is the same thing. Once there is a new branch, they can then explain Jamii Bora to people in their home village in a

About Jamii Bora

Jamii Bora Kenya Limited (a subsidiary of Jamii Bora Trust) is a microlending organization which seeks to assist its members in getting out of poverty and building better lives for themselves and their families. Headquartered in Nairobi, Kenya, Jamii Bora operates more than 100 branches across the country to reach its members with financial and social products and services. At the core of Jamii Bora is a fundamental belief that any family, however poor or hopeless, is capable of getting themselves out of poverty. Jamii Bora takes a uniquely comprehensive approach to helping strengthen and utilize all the skills, determination, and hard work of the people of Kenya to build a better nation through better families. Jamii Bora is one of the fastest-growing MFIs in Kenya and has ambitious plans to reach half a million people by the end of 2009. www.jamiibora.org

nov/dec 2008

way that they understand. Another way we are growing is through technology. We now have modern POS machines and are centrally networked. Any transaction, in any slum, in any village, in any part of the country, is tracked in real time. When a person registers as a new member, their registration is sent to the head office and their membership card is ordered the next day. Within a week, the member has a card. Each branch has the technology to track these transactions in real time. We do not use the traditional passbooks as they do at Grameen. In that sense, we are fairly modern. We are as modern as any other bank. While other banks have gone step by step in their technological evolution with a big investment at every step, we can just jump from handwritten passbooks to the most modern technology you can think of. CR: What innovations do you see for Jamii Bora in the coming years? Ms. Munro: Jamii Bora has grown very big and many of our more mature members are doing very well. For our members that have been successful, we are now thinking about how we can offer them proper banking services such as checking systems so that micro-entrepreneurs can pay their employees. That’s one of the ways we see ourselves growing into a more formal sector. Right now, MFIs can’t handle such services, so we’ll need to partner with a bank or eventually become a bank ourselves. While we don’t have the license from the Central Bank of Kenya to do this, the concept is in place. Grameen has shown that an MFI can become a proper commercial bank and still serve the poor. In 35 years, they have never abandoned the poor and have shown that you can be a commercial bank and not abandon your mission. So if anything, we would like to be the Grameen Bank of Africa. We still admire Grameen Bank as a model. CR: How do you conduct good due diligence of new members or mature members in such a short turnaround time? Ms. Munro: Our rule is that you can borrow twice as much as you have saved. When you get into bigger loans, you can borrow more than twice. When you have paid and finished your previous loans with no defaults in your group, you are eligible for additional loans. As members climb, they begin to build a credit history. So all

perspectives members have account numbers in our system, and at the touch of a button, we can print out their entire credit history. Before our system was set up like this, you could get this information but it took much more time to build it and review it. We go by the credit history and our members know that. CR: Tell us about Kaputei Town, the ecofriendly housing project you have started. Ms. Munro: Kaputei Town is a community of 706 houses, which are close to being complete now. People are getting their housing loans now and have signed up for specific houses; the ownership of each house is now clear. We are in a very exciting period. It’s a very unique program actually. To my knowledge, it has never happened before that poor people have come together to build their own town. And this is not going to be the last town. Once this one is full, we’ll continue. Kaputei Town is truly a town designed by the poor for the poor to get them out of poverty. We are creating a new middle class in a way. When we first started, we began by asking our members about what they wanted in a community. And of course we had to design it to be affordable and still be very good quality. That was the biggest challenge. I have dealt with housing all of my life and I’m an architect and urban planner by profession. The biggest challenge we had was infrastructure such as sewers, water, and roads. So we actually developed very innovative solutions such as recycling methods to clean sewer water and recycle it back into clean water for the town. For most parts of the world, it has been a very important part of developing a poor country into a welfare state. Even the World Bank admits that asset formation is as important as income generation to take people out of poverty. It is actually a topic of its own. Housing is so important. It is usually terribly underestimated when you talk about getting out of poverty. Against all of the odds, we were determined to make this project work and prove that quality, affordable housing for the poor is possible. CR: How do Jamii Bora members become eligible for a housing loan? Ms. Munro: To be eligible, you have to have had at least three successfully managed business loans and been a member of Jamii Bora for at least three years. Once you’ve signed up for www.microfinanceinsights.com

the housing program, you choose the house you prefer in that neighborhood. The best outcome of this project has been that it brought poor people together. It has really sparked a movement, bringing people together regardless of their tribe.

“We have never felt it was important to develop research or a measuring stick to determine whether someone is still poor or not. If a woman says that she isn’t poor anymore and that is how she feels, then we believe her.” - Munro, Founder, Jamii Bora

CR: When you look back on Jamii Bora and wonder if you’ve been successful, how do you measure that success? Ms. Munro: When people climb out of poverty, then we know they have been successful. We have never felt it was important to develop research or a measuring stick to determine whether someone is still poor or not. If a woman says that she isn’t poor anymore and that is how she feels, then we believe her. I don’t think it’s helpful to her if we then bring someone in to measure her against some other measurement of poverty. We know our members and we know whether they are climbing out of poverty or not by the relationships we have with them. If someone with the external measuring stick defines this woman as still being poor even though she feels her life has improved, you take away her pride, and that is very damaging. CR: So when someone asks you about what metrics are being used to measure the impact of Jamii Bora, what do you say to them? Ms. Munro: We’ve had this debate. I have not wanted to bureaucratize the process and get trapped into spending a lot of our time and our members’ time trying to study whether a member is really in or out of poverty. You have to remember that people don’t climb out of poverty after one loan; it is a long process. If you start measuring people against a scale that is developed by some research, then it will be difficult to appreciate incremental, positive changes that

have happened for that individual. At first glance, it might look like a person who has had just a few loans over the course of one to two years might still be living in poverty; but if you ask them for their opinion, they might say that their life is better. They might tell you that their daughter is in school for the first time. That is what she invested her money in. Ultimately, I think it is the people themselves that have to decide whether they are better off or not and what they want to invest in to take that next step on the ladder to get out of poverty. No one can tell you whether you are or are not better off; only you can decide. CR: Where is Ingrid Munro going next? What are the next big innovations, products, and/or technologies on the horizon for Jamii Bora? Ms. Munro: Right now, we are very focused on growth into very remote areas. Growth is our biggest challenge now, because we have the technology, MIS, tested methods, and a strong group of experienced staff. We are ready to grow. There are so many people that say they need us. The challenge we have is that we are exposed every day from people throughout the country and we are trying to respond to their needs. CR: What words of wisdom would you offer other MFIs and to the people working in the microfinance industry (from networks to microfinance investment vehicles to banks)? Do you believe that the model you have built in Jamii Bora can be replicated in other countries in Africa or beyond? Ms. Munro: I think people need to adapt to their own conditions, culture, personalities; but the main thing is to understand and see the talents and potential in everyone and understand their members. To understand their members is the most important thing. You can’t understand them if you don’t live with them or know their conditions. My advice is that I think the strongest part of Jamii Bora is that we recruit our staff from the membership and then we train the staff in-house. And then you have to remain positive and live with, respect, and understand your members. n

Chevenee Reavis, Senior Manager, Global Communications at Unitus interviewed Ingrid Munro on behalf of Microfinance Insights. Unitus supports Jamii Bora by providing capital guarantees and grant support. Unitus is an international nonprofit organization that works to reduce global poverty by increasing access to life-changing microfinance services. Unitus’ portfolio reaches more than 5 million families through 22 partners in Argentina, Brazil, Cambodia, India, Indonesia, Kenya, Mexico, and the Philippines. www.unitus.com nov/dec 2008

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global viewpoints

In its embrace, Africa boasts over 50 countries, 900 million people, and a fifth of the world’s total land area. Within this expansive continent, we came across some of the most compelling, interesting work happening in the sector. Through short interviews, we bring you a cross section of borrowers, practitioners, investors and technology providers from seven African countries. We hope they will provide a snapshot of the microeconomic activity and success within the continent.

Solutions of Epidemic Proportions HIV/AIDS affects roughly 33 million people across the globe, 22 million of which are in Sub-Saharan Africa.(UNAIDS/WHO 2008 Reports) Battling this epidemic has long been a concerted international effort among many sectors – including microfinance. HIV/AIDSaffected populations are a special-needs category within microfinance. Extending financial services to HIV/AIDS-affected persons means a chance at a better life, a higher standard of living, and greater social acceptance. Because their needs are slightly different, MFIs need special tools to help them become financially included. PlaNet Finance in Benin has an ongoing project that works towards extending microfinance support and socio-economic inclusion of persons living with HIV/AIDS. Microfinance Insights caught up with Romain Delahaye, Heath Program Manager at PlaNet Finance, to find out more about its programs. Profile

Romain Delahaye, Health Program Manager PlaNet Finance, Benin

There are several countries in Africa where the rate of HIV/AIDS infection is over 20% of the population. Why does PlaNet Finance focus on Benin? In Benin, 1.9% of the population is infected with AIDS. UNAIDS forecasts that if nothing is done, the rate will approach 20% in 2025, that is, 1,500,000 persons infected and 1,400,000 deaths caused by AIDS. The cumulative number of cases of AIDS has climbed from 1 in 1985 to 1,066 in 1994 and to 6,203 in 2003. Persons living with AIDS are the most vulnerable to unemployment and extreme poverty. What are the objectives of this program? The objective of our program is to help persons

living with HIV/AIDS get better integrated into society, and the way to do this is to develop Income Generating Activities and microfinance. We not only help MFIs extend financial assistance but also help the loan recipients build capacity, and strengthen and develop their businesses. The other objective is to make HIV/AIDS awareness and prevention one of the non-financial services delivered by MFIs. We also work to enable MFIs to include financing for income-generating activities undertaken by persons living with HIV/ AIDS and work to prevent the spread of HIV/ AIDS among their beneficiaries (i.e., their family and others they interact with). What sort of product-adjustments do MFIs need to make for HIV/AIDS-affected clients? Flexibility in the repayment cycle? The loan amount? In Africa, the first hurdle for HIV/AIDS-affected clients is for them to recognize that they have

difficulties. In our programs, we consider affected people as targets for improvement of their economic development. To do this, we need to monitor the client and provide guarantees. Repayment cycles are an issue. For MFIs, each time the repayment cycle is disturbed, an adapted response needs to be employed. This is an area where MFIs need solutions. Why is it important for organizations such as Planet Finance to be involved in HIV/AIDS? We are concerned each time that poverty wins ground; we are concerned with the need for new mechanisms to fight back each time this happens. MFI networks need to have the necessary support to bring the best services for the most vulnerable people and microfinance must to be a real tool to fight against all kinds of poverty.

One Borrower, Two Schools, Many Jobs Poverty is a pervasive and persistent phenomenon in the largely agrarian country of Ethiopia. About 38% live below the poverty line. A key component of Ethiopia’s development strategy is the establishment of sustainable MFIs that focus on increasing agricultural productivity and incomes, diversifying sources of income, and building household assets. DESCI, created in 1994, was ranked 31 in the Forbes top 50 list of MFIs. Here, DESCI’s success is reflected upon by Ataklti Kiros, the organization’s general manager, who shares with us the story of Fitiwi Beyene, a 62-year-old man who has not only come out of abject poverty, but also now runs two kindergarten schools and a supermarket. “Had it not been the goodwill of the institution, I would not be able to tolerate all challenges of my life. I could not also send my children to school. So, DECSI is my savior.” --Beyene www.microfinanceinsights.com

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microfinance insights

global viewpoints Profile

Fitiwi Beyene, Borrower and Entrepreneur Desci, Ethiopia

Tell us about Mr. Beyene. Fitiwi Beyene is one of our best borrowers. He is 62 years old and a family man. He was previously a civil servant, but now he is a pensioner. And, he owns an MSME financed by DECSI. Eight years ago, Mr. Beyene was earning only Birr 461 (US$48) monthly salary. His income was very low for him to lead his family, so he became a DECSI customer. Now, he is one of the best customers who has graduated from poverty. How have his loan sizes changed as he has graduated out of poverty? For the first three years, he took Birr 2,500

(US$260). For the next three years, Birr 5,000 (US$520). And for the last two years Birr 10,000 (US$1040). How has the loan affected his life and the life of his family? Nine members of the family are now involved in his business—two kindergarten schools and one supermarket. He created jobs for seven teachers, two kindergarten directors, two guards and three cleaners in both kindergartens. His business is regularly monitored and evaluated by the bureau of education. He also arranges community meeting for comments. How has Mr. Beyene achieved such success? The secret to his success is his ability to coordinate and lead not only his family, but also his group members towards a bet-

ter living standard through applying the financial management and planning skills introduced by DECSI. What is next for Mr. Beyene? He was aggressively complaining to the staff of DECSI to allow him more loans in order to expand his business. He is now very happy, as he is allowed to take a loan of Birr 10,000 (US$1,031).

Empowering Communities After Civil War Sierra Leone’s civil war, which started in 1991 and reached its official conclusion in 2002, was precipitated in large part by conflicts over control of the diamond trade. The Revolutionary United Front initiated the eleven year conflict, which killed tens of thousands of people and displaced more than two million. Reconstruction and development are the biggest challenges facing post-war Sierra Leone, along with food insecurity and lack of investment. A majority of the population lives under the poverty line, as unemployment figures grow and socially alienated youth remain a threat to security. Microfinance Insights discussed the initiatives of one MFI, Salone Microfinance Trust, as it works to help empower its clients. Profile

Regina Sulla, Executive Director

Salone Microfinance Trust, Sierra Leone Was Salone Microfinance Trust in operation during the war? No. After the civil war, the Christian Children’s Fund-Sierra Leone (CCF-SL) focused on assisting the reintegration of ex-combatants returnees and displaced people. The project ended in December 2003, and the microcredit program established itself as a microfinance institution, Salone Microfinance Trust (SMT), independent from other CCF-SL programs, with a mission to reduce poverty in post-conflict Sierra Leone. Currently, SMT has 4,792 active clients in two branches and two sub-branches. What is the focus and strategy of SMT? SMT provides loans to poor families, specifically women and youth in the districts of Tonokolili, Koinadugu and Bombali. Our market niche and strength are the underserved rural areas that suffered the effect of the war. The institu-

microfinance insights

tion uses the group solidarity methodology in which clients form groups of four to six people and guarantee each other’s loans. This lending methodology focuses on graduating clients in stages to individual and larger loan amounts. Salary loans are given to teachers, nurses, police force members and others from higher institutions of learning. The loans are mainly used to pay school fees, purchase building materials, furniture, equipment, agricultural investment and trading. SMT is the only MFI that provides group loans to subsistence farmers in Bombali and Koinadugu districts. The loans are mainly for purchasing seeds, fertilizer, marketing and labor. What is your biggest operational challenge? Lack of sufficient loan capital to meet the market demand, which sometimes causes untimely loan disbursement and has led to waiting lists for loans. We also worry that a high increase in inflation may affect portfolio value and decrease profitability.

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Regina Sulla, Executive Director, Salone Microfinance Trust

In terms of working in a post conflict environment, what effect does microfinance have? Beyond helping clients with smooth means of consumption and protecting themselves against economic shocks, SMT creates social benefits on an ongoing, permanent basis and on a large scale. SMT can also play tangible role in social and political reconciliation by getting hostile groups to trust one another by working together in lending groups. SMT enables the vulnerable population to resettle and rebuild their economic status in post-conflict Sierra Leone, because it is

global viewpoints well-designed to suit the culture and environment of the clients. How has working in the microfinance sector influenced you?

During my three and half years working in post conflict Sierra Leone, I have seen women and youth improve their livelihood through microfinance. Many clients build houses from their income and are able to pay school fees for their

children. I strongly believe in microfinance as one of the best tools to reduce poverty in Sierra Leone and empower women in the society.

Building Nigeria’s Economy In 2005, the Nigerian government enacted a microfinance framework that required Community Banks (CBs) to transform into microfinance banks, requiring a four-fold increase in capital in order to operate. As a result of the new requirements, at least 145 CBs that were not able to comply with capital requirements shut down. While the new framework has reduced the number of microfinance providers, most think it has also created a more sound financial system. Subsequently, the government has established a US$426m microcredit development fund to encourage the advancement and expansion of microfinance services. Currently, the existing MFIs in Nigeria serve less than one million people, while the demand is thought to be about 40 million. Alitheia Capital was launched recently in order to catalyze the development of microfinance in Nigeria. Ms. Tokunboh Ishmael, Managing Director of Alitheia, spoke with us about their investment strategy. Profile

Tokunboh Ishmael, Managing Director Alitheia Capital, Nigeria

What country/region do you focus on? Alitheia Capital (based in Lagos, Nigeria) and Goodwell BV are partnering to invest in MFIs in Nigeria towards the combined objectives of social and economic impact. Why are you investing in microfinance, and why now? Our interests in microfinance stem from the desire to have a positive impact and contribution to economic development in Nigeria and indeed West Africa. There is no time like the present. While Nigeria has enjoyed an oil-fuelled boom and political stability over the last few years, much of the populace have remained margin-

alized and “out” of the formal sectors of the economy – hindering them from participating in this boom. Hitherto, microfinance has been ignored because institutions have viewed it as a “sorry case” sector. Our belief is that economic empowerment is key to broadening the participation of the populace in the economy not just through aids and grants, but also through business ownership. What size of MFI are you focusing on, and what is your average investment size? The Alitheia Goodwell fund is set to commence investing activities in Q1 2009. A pipeline of potential investments is currently being assembled; these consist of startup and transforming MFIs seeking a turnaround to economic sustainability. We are targeting an average investment size of US$1m.

How has the global credit crunch affected your business? The “crunch” is having an impact on our fundraising, as potential investors review their pipeline. How do you think microfinance will help build Nigeria’s economy? Across West Africa (and indeed globally), it has been recognized that much of the activity that will spur sustainable economic development will happen through micro and small businesses. Therefore, by providing the fuel that powers such businesses, microfinance will play a large part in helping these countries meet their Millennium Development Goals. Economic empowerment enables issues of poverty, illiteracy and health to be addressed.

The Youngest Entrepreneurs In countries where life expectancies are low, and many children are orphaned at a young age, young people often have to find ways to support themselves financially. MFIs often work with youth to help them learn about savings, and in some instances, start small businesses. Youth microfinance initiatives can help combat child labor, support the fight against HIV/AIDS, support reproductive health interventions, and decrease anti-social behavior. ALIDE, is one of the many organizations that supports youth through microfinance. It operates in several cities in Benin, and is supported by the organization Entrepreneurs du Monde. Laetitia Raginel, West Africa Coordinator for Entrepreneurs du Monde, told us about Ida Zossou, a 17-year-old borrower who is growing up in a culture of microfinance. “I dropped out of school because I lacked the support. But since I met ALIDE, I am hopeful again. I will be able to go back to school and to succeed like any other child.” -Zossou Profile

Ida Zossou, Youth Borrower Alide, Benin

What is Entreprenurs du Monde? www.microfinanceinsights.com

Entrepreneurs du Monde (entrepreneurs of the world) is an NGO founded in 1998 and based in France. It operates in developing countries to enable the poorest families to develop a small economic venture by giving them access to credit,

savings, and training. Its partner MFI in Benin is ALIDE, an institution that reaches out to some 5,000 families in Benin.

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microfinance insights

global viewpoints What is one of ALIDE’s youth borrower success stories? Ida Zossou was born into a poor family in Ganvié, a stilt village in South Benin. Ida’s father passed away and her mother disappeared. She moved to her paternal aunt’s house in Cotonou after that. Unfortunately, death was to strike again. Her aunt succumbed to a long and painful illness. Once again, Ida was left alone. She dropped out of school because she couldn’t afford to pay the fees. To be able to buy food, she started helping neighbors sell their wares. By doing so, she managed to make about XOF 250 a day (US$0.50). How did ALIDE meet Ida? One day Ida heard about ALIDE and the possibility to get a small loan to start an income-

generating activity. Despite her lack of resources and her young age, Ida qualified for a kick-start loan, a product that is specifically designed for very poor people with amounts ranging from XOF 10,000 to 20,000 (US$20-40) for a duration of three to six months without any collateral. Because it is targeted to the poorest of the poor, the beneficiaries of this 0% loan are coached by both a credit officer and a social worker. After analyzing Ida’s situation, ALIDE decided to grant her a XOF 10,000 loan. Her project was to sell children’s clothes and the enterprising young lady did a great job. ALIDE trained her in how to manage a small business and develop her sales techniques. Not only did she never miss a payment, she is actually planning to reimburse her loan earlier than scheduled.

Ida Zossuo, Young Entrepreneur

If Ida is managing a small enterprise, how is she managing her studies? This autumn, Ida will also be able to resume her studies, as the social worker at ALIDE put her in touch with a local association that can help her pay her school fees.

Sound Investing in Ghana According to the 2007/08 Human Development Index, Ghana ranks 135th out of 177 countries. It is one of the poorest countries in the world, but its growth rate is currently 6%, higher than some developed countries. In the last five years, the government of Ghana has taken measures to create an enabling environment for microfinance by encouraging savings, promoting small-scale enterprises, and enabling private investment. At a September 2008 event at Columbia University, keynote speaker economist and professor, Jeffrey Sachs, stated, “Ghana has every reason to succeed in attracting investment. It has great leadership under President John Kufuor, a stable democracy, very fertile land where everything will grow, a great cultural heritage, and recent improvements in infrastructure.” Ms. Patricia Safo agrees that Ghana is ripe for investment, and her investment fund JCS is working to bring in new investment in microfinance institutions there. Profile

Patricia Safo, CEO

JCS Investments Ltd., Ghana What is JCS’ focus area? An important part of the strategy of JCS Investments Ltd is to establish itself as a reliable and efficient avenue to distribute microfinance to MFIs in Ghana, Liberia and Sierra Leone within the West Africa sub region. JCS Investments believes it can work closely with MFI located in both the rural and urban areas, with the objective of not only accruing sound returns to our investors, but also helping to reduce poverty in these areas. What is your strategy with regards to microfinance and microenterprise investing? We are aware that women are very active in micro-enterprises in the regions we are operating in, but we are also aware that an increasing number of young people (men and women) are beginning to play a key role in micro enterprise in Ghana. JCS Investments Ltd believes that microfinance enterprise is one of the fundamental

microfinance insights

building blocks in emerging economies in West African like Ghana and it can use this opportunity to contribute positively to poverty alleviation in this region. How has the global credit crunch affected your business? The global credit crunch may limit the rate at which we are able to grow and invest in the sub region, but we also believe that the growth

Particia Safo, CEO, JCS Investments, Ghana

What is Susu?

Susu, or savings mobilizers, is one of the oldest forms of finance in Africa. Susu collectors are particularly prevalent in Ghana. Susus take deposits in small amounts on a daily basis from individuals or groups, and at the end of the month, they return the savings to the saver or group, after taking a commission. Although these collectors are informal financiers, Ghana has formed an apex organization to support and police them, the Ghana Cooperative Susu Collectors Association (GCSCA). Over 800 collectors in Ghana are registered with the organization. Recently, mainstream banks like Barclays and Citibank have worked with Susu to enable them to provide credit to customers. According to Barclays, Susus handle the equivalent of US$140m a year.1 1. “Do you Susu?” Allianz Knowledge. Available at http://knowledge.allianz.com/en/globalissues/microfinance/traditional_finance/history_moneypool_susu.html

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global viewpoints potential in the micro-enterprise sector is very sound in the countries we are operating in. Consequently, this sector will continue to grow locally in spite of the global credit crunch.

How do you think microfinance will help build Ghanaâ&#x20AC;&#x2122;s economy? One of the main challenges to growth within Ghana, and the countries we are collaborating

with, is the need to ensure that capacity building goes hand in hand with financial investment. The management of human capital plays a key role in this process. n

Islamic Finance It is estimated that 72% of people living in Muslim-majority countries do not use formal financial services (CGAP Focus Note 49). The non-compatibility of traditional financial services with Islamic laws only further alienates those looking for Sharia-compliant products and services. Unlikely as it might seem, The Banker magazine recently named the United Kingdom as one of the top 15 countries managing Sharia-compliant assets. While many Muslim-majority countries are beginning to offer Islamic finance, Islamic microfinance still seems a long way off in a majority of the countries that need it. Eighty percent of Islamic microfinance happens in Indonesia, Bangladesh and Afghanistan. Clearly, millions of unbanked have yet to be reached in Africa â&#x20AC;&#x201C; particularly in the Arab states of the North. However, offering Islamic Microfinance in the region is not as straightforward as it may seem, as Heather Henyon from Grameen Jameel tells us. Profile

Heather Henyon, General Manager Grameen Jameel Middle East and North Africa

What is the demand for Islamic Microfinance in the North Africa region? According to a CGAP Focus Note the demand in some the MENA region (including Algeria) is as high as 20-40%. In what country in Africa is Islamic Microfinance most developed? We are seeing increasing demand for an Islamic microfinance loan product in the rural areas of Morocco.

Although the sector is still growing in the region, do MFIs see Sharia-compliant financial instruments as necessary for their portfolio? What percentage of MFIs offer Sharia-compliant savings/credit/insurance products? What is the most commonly offered product? Most MFIs in the Arab region, including North Africa, do not currently offer a Shariah-compliant product. Credit is still the predominant product in the Arab world, as government restrictions prevent the offering of deposits. Islamic microfinance has been offered in Yemen, Syria and Saudi Arabia.

Islamic microfinance is a fairly nascent sector, with a stronger presence in the Middle East, and less so in North Africa. Why is this? The countries in the Middle East tend to have governance systems that incorporate Islamic law whereas the North African markets do not. What is the biggest challenge when it comes to administering Islamic microfinance? The accounting systems and maintaining different sets of books, especially if offering both conventional and Islamic microfinance products, creates a burden as well as additional costs for the MFI.

A Foundation for Connectivity Microfinance institutions worldwide recognize that technology is essential, not only to reach new people, but also to make their business more cost-effective and sustainable. Despite lagging behind most others countries in terms of economic development, Africa is quick to make the technological move. Although only about one-third of the MFIs in Africa are computerized, those that are computerized are increasingly employing other technologies to increase their outreach and/or their profitability. Craft Silicon is an information technology company providing complete systems solutions from conception to implementation and maintenance. Kamal Budhabhatti, the CEO of Craft Silicon explains the penetration of technology in MFIs in Africa, and the specific challenges one encounters in working in these markets. Profile

Kamal Budhabhatti, CEO Craft Silicon, Kenya

You market your products in several regions around the world. Have you noticed any differences in the way technology is adopted/ utilized in various markets? We market our products in four continents across the globe. Obviously, there is big difference in the way different MFIs operate in different regions. Whereas different organizations employ varying www.microfinanceinsights.com

percentages of our software, the Asian and West African institutions use it the most. I think this is purely driven by the demands of the market. One thing is very clear: organizations that are using IT as a tool have grown fast. What are the challenges of working in the microfinance market in Africa? Working with MFIs in Africa has been a pleasant challenge. In some countries, the literacy level for using a technological device for operations is low. So, along with educating them on how

to use Bankers Realm, we also have to play a role in educating them on what a computer is and how to use it. One thing that we really like about working with most of the African MFIs is that once you teach them how to do something step-by-step, they follow it religiously, unlike some MFIs that we have working in Asia and Latin America where the users try to explore and take short cuts that sometimes have disastrous results.

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microfinance insights

global viewpoints How will technology contribute to the future of microfinance in Africa? What microfinance in Africa needs is true outreach. In Kenya, for example, there are very few MFIs that go to each and every required corner. Jamii Bora is one of the very few that has embraced technology to reach the rural unbanked population effectively. In order to achieve this outreach, technology is a must. What is your most popular product for MFIs? We have a suite of products ranging from Core system to delivery channel products. Our core product Bankers Realm MFO (Micro Finance Officer) is one of the most popular products. However, with the current trend of MFIs opting for branchless banking operations, our Elec-

tronic Switch and POS [Point of Sale] software are also becoming very popular. We expect that Bankers Realm Mobile software would also become popular in time. How long does it take the average small MFI to implement Bankers Realm MFO? The Bankers Realm MFO customer base is quite varied. We have some very small MFI and some very big MFIs using our products. The installation time depends on various conditions like organization size, support from management, types of products, the old system that they are using and the organization’s vision. We have computerized MFIs in less than a week, whereas some have taken more than a year. However, generally it takes about two to three months to

computerize an average MFI. We have noted that it is easy to computerize a commercial bank compared to an MFI. Craft Silicon has been selling software for banks and MFIs for several years. Now you have a Foundation that has a different strategy. What is the goal of the Foundation? There are times when the human side of [our business] sees that there is clear case for charity…that our technology would help the MFI and also the people that this MFI serves. Since Craft Silicon, a for-profit organization, cannot do this directly, we decided to channel this assistance through our Foundation, which we will use to distribute US$200,000 worth of software products every year. n

Save the Date

Microfinance in Africa: What Works?

The Future of Entrepreneurship, Technology & Regulation Panel Discussion and Issue Launch Event Thursday, November 20, 2008 10:30 AM-2:30 PM Serena Hotel, Nairobi, Kenya

Key Panelists:

Kamal Budhabhatti, CEO, Craft Silicon Wagane Diouf, CEO, AfriCap Dave van Niekerk, CEO, Blue Financial Ingrid Munro, President and Founder, Jamii Bora (invited) On November 20, Intellecap will host an event in Nairobi, Kenya to celebrate the launch of the newest issue of our magazine, focused on “The African Landscape.” A panel of diverse leaders from the microfinance space will come together, including players from commercial microfinance, the investing side, the regulatory side, and technology, to have a significant discussion on the future of entrepreneurship, technology and regulation. There will be a lunch networking session after the panel discussion. Please contact Jerilene@mfinsights.com for event details and to receive an invitation. Lead Sponsor

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Associate Sponsor

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entrepreneurship

Women Entrepreneurs: Transforming Necessity into Opportunity

Michael Strong is the CEO and Founder of FLOW, a U.S.-based organization focused on creating peace and prosperity through entrepreneurship. He is currently working to foster the development of women entrepreneurs in developing countries in order to alleviate poverty and to improve the lives of women and children. Strong explains the importance of supporting womenled microbusinesses not only through microfinance, but also through the creation of market opportunities.

oltan Acs, research chair of the Global Entrepreneurship Monitor (GEM) project, has researched how different types of entrepreneurship result in poverty alleviation. The GEM project is the world’s largest research project studying the impact of entrepreneurship. The research program, based on a harmonized assessment of the level of national entrepreneurial activity for all participating countries, involves exploration of the role of entrepreneurship in national economic growth. The single most important discovery of the GEM project is that the higher the ratio of “opportunity entrepreneurs” to “necessity entrepreneurs,” the less poverty there is in a given country.

engaging this argument directly, it is likely that many microentrepreneurs more closely resemble Acs’ “necessity entrepreneurs” rather than his “opportunity entrepreneurs.” Rather than follow Dichter in criticizing microentrepreneurship for this fact, an alternative approach, more consistent with the motto “criticize by creating,” is to help more women become successful opportunity entrepreneurs. Certainly Muhammad Yunus, and others in the microfinance movement, have celebrated stories of microentrepreneurs who have created substantial businesses—the largest Grameen borrower now owns several apartment buildings and borrows US$20,000 at a time, after starting from pennies a day.

“The single most important discovery of the GEM project is that the higher the ratio of ‘opportunity entrepreneurs’ to ‘necessity entrepreneurs,’ the less poverty there is in a given country.”

Creating a More Profitable Market Coming from a different direction, a number of socially-minded businesses and entrepreneurs in the U.S. have realized that marketing goods made by microentrepreneurs and craftspeople to customers in the U.S. can increase the earnings of microentrepreneurs considerably—there is a limit to the amount of money one can make selling eggs to your neighbors. If microentrepreneurs can market crafts to consumers who can afford to pay more, they can earn significantly more income. Some of these projects are very small and closely connected to the world of microfinance. For instance, Maggie Miller, an American entrepreneur and Founder of DiscoverHope, created a small microfinance project in Peru that included entrepreneurial training and product development advice. She now sells the products made by microentrepreneurs in her Peruvian network through personal and

Necessity vs. Opportunity Necessity entrepreneurs are typically self-employed individuals who are “entrepreneurs” simply because they have no other means of earning an income. They are buying and selling goods in order to get by. Opportunity entrepreneurs, on the other hand, are building businesses that grow and thereby create an increasing number of jobs. Many of the critics of microfinance, such as Thomas Dichter,1 claim that microloans are primarily used for consumption rather than for investment in business activities.2 Without www.microfinanceinsights.com

Senegalese craftswomen create products that are marketed in the West.

social networks in the U.S. At the other extreme is eBay’s The World of Good, a large-scale corporate initiative, with product lines now carried by Whole Foods Market, the world’s largest retailer of organic and natural foods, that sources products from diverse artisans that often have no direct connection to the world of microfinance. In between are many hundreds of organizations now selling artisan-made crafts in the developed world.

“Unlike marketing products from developing-world artisans, this approach focuses on helping developing world women become relatively wealthy and powerful business people within their own country.” Identifying Opportunity Entrepreneurs Another approach is to identify women in the developing world who have the entrepreneurial talent to succeed in exporting products to the developed world and to help them create substantial businesses. Unlike microfinance, the focus is unambiguously on opportunity entrepreneurship rather than a mix between necessity entrepreneurship and opportunity entrepreneurship. Unlike marketing products from developing-world artisans, this approach focuses on helping developing world women become relatively wealthy and powerful business people within their own country. We call this approach Accelerating Women Entrepreneurs, respecting the fact that there are many authentic women entrepreneurs around the world, but that the

nov/dec 2008

microfinance insights

entrepreneurship progress of these women can, and should, be accelerated. Often the early “fast runners” in this category will be women with international contacts and education. For instance, Magatte Wade-Marchand is a Senegalese woman who was educated in France and who started her business career in the U.S. She was motivated to start a beverage company after returning to Senegal and discovering that people there were increasingly drinking Coca Cola rather than the traditional hibiscus beverage she had grown up with. She realized that only when a Senegalese product succeeded in the U.S. would the Senegalese respect it, so she launched Adina initially in the U.S. Adina is now a multi-million dollar beverage company, based in San Francisco, and Mrs. Wade-Marchand now runs an associated foundation that is dedicated to identifying Senegalese women entrepreneurs who have the potential to market their products in the U.S. One of the entrepreneurs she discovered is Yayi Bayam Diouf, the head of the Women’s Collective against Clandestine Emigration from Senegal. Mrs. Diouf is the leader of a Senegalese village that lost almost all of its men in the Atlantic Ocean during attempts to escape to Spain on small boats. After grieving the loss of boatload after boatload of young men, the village women decided to quit grieving and get to work creating goods that they could sell to escape poverty. When discovered by Mrs. Wade-Marchand, they were producing small dolls for the tourist market; a reasonable product, but one made by thousands of other local Senegalese craftspeople. Mrs. Wade-Marchand, who cut her entrepreneurial teeth as a head-hunter in Silicon Valley, knows how to spot that combination of talent and fire-in-the-belly that is needed for real entrepreneurial success. She recognized in Mrs. Diouf, and in the entire village, a powerful group of women who are, in fact, determined to succeed as entrepreneurs. But without the expertise in branding, marketing, and distribution channels in the U.S., Mrs. Diouf and her highly motivated women would not have an opportunity to sell to the far more lucrative U.S. market. To take a different example, Marcella Echavarria is a Colombian woman who has lost many

friends and family members in the endless drug war violence that has plagued her country for many years. Ms. Echavarria has created a multimillion dollar high-end luxury brand, Surevolution, based on artisanal crafts from around the world and marketed through high-end retailers such as Donna Karan, Ralph Lauren, Neiman Marcus, as well as galleries and museums. She has developed a network of women entrepreneurs in Colombia, Peru, Bolivia, and India from whom she sources her products, such as Gabriela Flores, creator of Kirah Design, in Bolivia. As in the case of Mrs. Wade-Marchand, Ms. Echavarria is leveraging her expertise with U.S. branding, marketing, and distribution channels to help women entreprepreneurs from the global south reach much larger markets than would have been possible without her help.

“More importantly, such self-sufficient and economically powerful role models challenge traditional cultural notions regarding the role of women in a society.” To take yet a third example of this growing movement, Donna Hadjipopov is an American woman who married a Bulgarian man, and on repeated trips to Bulgaria she wanted to address the poverty and lack of opportunity for women. She admired the pottery and textiles made by local entrepreneurs, and realized that with the right modifications they could be imported into the U.S. She worked with local producers to modify their products appropriately – demanding manufacturing techniques that did not use lead in the paints and glazes used on the pottery, and introducing new colors and modifying traditional designs to make them more appealing to the U.S. market. She also introduced new approaches to management and quality control to ensure a reliable supply chain. The result is that she has now created an import company that is successfully marketing Bulgarian products through major retailers in the U.S., and as a consequence of growth she will be creating, through her suppliers, hundreds of good jobs in Bulgaria. Each of these women, Wade-Marchand, Echavarria, and Hadjipopov, share a personal

experience of successful cross-cultural entrepreneurship combined with a passion to help others learn how to succeed as an opportunity entrepreneur that can sell products in the developed world. Each realizes that her personal story, and resulting expertise, is all too rare. While they all recognize that microentrepreneurship is a good thing, at the same time they realize that Senegal, and Colombia, and Bulgaria, will be very different places for women once each nation has several dozen high profile, highly successful entrepreneurial businesswomen. Changing the Gender Balance Such individual success stories not only create jobs and thereby alleviate poverty directly, they also change the power structure by forcing local elites, which are almost entirely male, to deal with independent businesswomen who are beholden to no one because they have their own source of economic power through their businesses. More importantly, such self-sufficient and economically powerful role models challenge traditional cultural notions regarding the role of women in a society. Muhammad Yunus has said that he regards Grameen Bank as a school that teaches entrepreneurship; more important than the physical loan is the individual empowerment that results from becoming responsible for one’s own financial well-being. The extraordinary global expansion of microfinance is one validation of Yunus’ dream. But, looking beyond the sheer growth of necessity entrepreneurs, there is an opportunity to help many thousands of women around the world grow large, substantial businesses that can compete in global markets. This will not only alleviate poverty, it will also create gender equity, driven, not as a result of legal mandate, but by the communal respect that entrepreneurs so often create. n

Michael Strong is the Co-Founder and CEO of FLOW.

1. An international development expert at the Cato Institute who co-authored the book, What’s Wrong with Microfinance? 2. Dichter, Thomas. “A Second Look at Microfinance.” Available at http://www.cato.org/pubs/dvp/dbp1.pdf

microfinance insights

nov/dec 2008

transparency

Creating Credit Bureaus to Penetrate a Cash Culture, Expand Credit A

frica has one of the lowest levels of credit penetration in the world. One way to expand credit is by establishing credit bureaus, or consumer reporting agencies, which collect, store, analyze, summarize and sell information about the credit worthiness of individuals. Without a credit history or collateral, it is difficult to gain access to finance. Credit bureaus help clients and lenders increase transparency and reduce risk, and encourage market forces to work more efficiently. The creation of countrywide credit bureaus requires banks to share information—which many are wary of due to competition. While the benefits of sharing credit information are considerable, banks are reluctant to succumb to pressure from African governments. To counter this, governments can assist lenders in building a credit information infrastructure by covering associated costs, and assisting in customer identification processes.

What is a credit bureau?

An agency which collects and sells information about the creditworthiness of individuals. A credit-reporting agency does not make any decisions about whether a specific person should be extended credit or not. However, it does collect information that it considers relevant to a person’s credit habits and history, and uses this information to assign a credit score to indicate how creditworthy a person is. As defined by www.investorwords.com

Africa’s Credit Reporting Systems Establishing credit bureaus in Africa can be difficult because there is not a culture of credit in place. Most transactions happen through cash or trade. However, several countries have made inroads, because research has shown that credit bureaus are critical to the expansion of credit.

Morocco’s Central Bank operates a databank that gathers information on all lenders and provides this information to private operators who are responsible for providing reports to lenders. The Bank of Tanzania also functions as a databank. In Angola and Mozambique, the public sector has driven the establishment of a credit bureau, and projects are underway to develop a credit registry that fosters reporting.

The Role of Regulators It is clear that regulators play a vital role in supporting information sharing among lenders, but there is no standard practice to develop an effective sharing mechanism.1 In August of this year, Kenya passed a law to provide for the licensing and establishment of credit bureau operations. The law makes it mandatory for banks to share information, and allow for the participation of private credit bureaus. The IFC has been supportive of the move. Mr. Jean Philippe Prosper, IFC’s Director of Eastern and Southern Africa, said, “The new regulations will provide a framework for a regulated and reliable system of credit information sharing, which should give the banks more confidence to lend to smaller business.” Ghana has also passed a law that requires lenders to participate in credit reporting. Innovations for the Unbanked For MFIs to fully utilize credit bureau information and services, they usually need to be regulated and the costs must be affordable. A new pilot is being tested in Uganda--the Credit Reference Bureau (CRB)—through a collaboration between Barclays Bank, Centenary Bank, Standard Chartered Bank, Uganda Microfinance and Pride Microfinance. Compuscan, a South African company, launched the CRB. Because Ugandans do not have a national form of identity, Compuscan has had to create a system for identifying

every person in the banking system. The company is working in tandem with banks and microfinance deposit-taking institutions (MDIs) to identify each customer with a biometric device and assign them a number and a smart card. The identification process has proved to be the costliest element of the creation of the CRB—it is also a bill that banks were not willing to take on. The government, the World Bank and KfW have covered the costs. Unfortunately, the credit bureau may not be usable by non-deposit taking MFIs and their customers because the are unregulated.

Several African Microfinance Credit Bureaus

• ITC-Information Trust Corporation, South Africa • CARE/Planet Finance Centrale des Risques, Benin • Micro Lenders Credit Bureau (MLCB) • National Loans Register (NLR), South Africa Meanwhile, IBM has partnered with CARE to establish the Africa Financial Grid, which will bring hardware and software infrastructure to eleven African countries. The Grid is expected to provide “dependable, consistent, pervasive, and inexpensive access to high-end computational capabilities.” The Africa Financial Grid has been designed with a feature that will allow MFIs to share information with credit bureaus and other MFIs. Projects such as these are promising for the microfinance sector. However, their potential may not be fully realized until lenders, governments and donors work together towards credit expansion in Africa and overcome the insufficient historical data in weakly regulated environments. - By Jerilene Creado, Associate, Intellecap

1. Uganda: New Uganda Credit Reference Bureau Compensates for Lack of National ID.” Ratio Magazine. October 2008.

www.microfinanceinsights.com

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microfinance insights

Mapping Africa Gross Domestic Product (Nominal)1 TUNISIA

MOROCCO ALGERIA

Western Sahara -

CAPE VERDE

LIBYA

Billions of U.S. Dollars

EGYPT

100 - 500 25 - 100 5 - 25 under 5 no data

MAURITANIA MALI

SENEGAL THE GAMBIA GUINEAGUINEA BISSAU SIERRA LEONE LIBERIA

NIGER

CHAD

ERITREA

SUDAN

BURKINA FASO

DJIBOUTI

IVORY COAST -

NIGERIA

GDP is the most commonly used single measure of a country’s overall economic activity. It represents the total value at current prices of final goods and services produced within a country during a specified time period, such as one year.

SOMALIA

ETHIOPIA

CENTRAL AFRICAN REPUBLIC CAMEROON

GHANA UGANDA TOGO KENYA BENIN REP. OF THE CONGO RWANDA GABON DEMOCRATIC São Tomé and Principe REPUBLIC BURUNDI EQUATORIAL OF THE CONGO GUINEA TANZANIA

SEYCHELLES COMOROS

MALAWI

• In the 2006/7 Doing Business Indicators, Mauritius, South Africa, Namibia, and Botswana were ranked among the top third best countries to do business, but the average rank of African countries was 136 among 178 countries.

MOZAMBIQUE

BOTSWANA

MAURITIUS Reunion (Fr.)

NAMIBIA

ZIMBABWE

• Burundi has the highest proportion of women in its labor force (90.5% 2005); Sudan has the lowest (22.5%).

Mayotte (Fr.)

ZAMBIA

• It takes 7% of GNI per capita to start a business in South Africa and 1195% in Sierra Leone.

ANGOLA

SWAZILAND

SOUTH

LESOTHO

AFRICA

Fixed Line and Mobile Phone Subscribers2 TUNISIA

MOROCCO ALGERIA

Western Sahara -

CAPE VERDE

LIBYA

EGYPT

MAURITANIA MALI

SENEGAL THE GAMBIA GUINEAGUINEA BISSAU SIERRA LEONE LIBERIA

NIGER

CHAD

IVORY COAST -

ERITREA

SUDAN

BURKINA FASO

DJIBOUTI

NIGERIA

SOMALIA

ETHIOPIA

CENTRAL AFRICAN REPUBLIC CAMEROON

Per 100 People <5 5 to 10 10 to 25 > 25 no data

GHANA UGANDA TOGO KENYA BENIN REP. OF THE CONGO RWANDA GABON DEMOCRATIC São Tomé and Principe REPUBLIC BURUNDI EQUATORIAL OF THE CONGO GUINEA TANZANIA SEYCHELLES COMOROS

MALAWI

MOZAMBIQUE

MA DA

ZIMBABWE NAMIBIA

BOTSWANA

SOUTH AFRICA

Mayotte (Fr.)

SC AR

ZAMBIA

Sources 1. World Economic Outlook. October 2008. International Monetary Fund. October 2008 <http://www.imf.org/external/datamapper/index.php> 2. World Development Indicators. 2006. The World Bank. October 2008 <http://go.worldbank.org/6HAYAHG8H0> 3. World Development Indicators. 2007. The World Bank. October 2008 <http://go.worldbank.org/6HAYAHG8H0> All facts: “50 Things You Didn’t Know About Africa.” Africa Development Inwww.microfinanceinsights.com dicators. 2007.

ANGOLA

MAURITIUS Reunion (Fr.)

SWAZILAND LESOTHO

nov/dec 2008

microfinance insights

Average Consumer Price Inflation1

ALGERIA

Western Sahara -

CAPE VERDE

Annual Percent Changes

TUNISIA

MOROCCO

LIBYA

25% or more 10% - 25% 3% - 10% 0% - 3% no data

EGYPT

MAURITANIA MALI

SENEGAL THE GAMBIA GUINEAGUINEA BISSAU

LIBERIA

CHAD

ERITREA

SUDAN

BURKINA FASO

IVORY COAST -

SIERRA LEONE

NIGER

The average consumer prices index (CPI) is a measure of a country’s average level of prices based on the cost of a typical basket of consumer goods and services in a given period. The rate of inflation is the percent change in the average CPI.

DJIBOUTI

NIGERIA

SOMALIA

ETHIOPIA

CENTRAL AFRICAN REPUBLIC CAMEROON

GHANA UGANDA TOGO KENYA BENIN REP. OF THE CONGO GABON DEMOCRATIC RWANDA São Tomé and Principe REPUBLIC BURUNDI EQUATORIAL OF THE CONGO GUINEA TANZANIA

SEYCHELLES COMOROS

ANGOLA

MALAWI

• In Ethiopia, 22% of the population has access to a safe source of water. In Mauritius, it is 100%.

BOTSWANA

MAURITIUS Reunion (Fr.)

• Mauritius has the highest life expectancy (73 years); Botswana has the lowest (35 years).

MOZAMBIQUE

ZIMBABWE NAMIBIA

Mayotte (Fr.)

• In Seychelles 92% of women are literate; the figure is 13% for Chad and 15% for Niger.

ZAMBIA

SWAZILAND

SOUTH

LESOTHO

AFRICA

Workers’ Remittances and Compensation of Employees3 TUNISIA

MOROCCO ALGERIA

Western Sahara -

CAPE VERDE

LIBYA

EGYPT

MAURITANIA MALI

SENEGAL THE GAMBIA GUINEAGUINEA BISSAU

NIGER

CHAD

IVORY COAST -

SIERRA LEONE LIBERIA

US$ Million

ERITREA

SUDAN

BURKINA FASO

1 to 50 50 to 200 200 to 1000 > 1000 no data

DJIBOUTI

NIGERIA CAMEROON

ETHIOPIA

CENTRAL AFRICAN REPUBLIC

SOMALIA

GHANA UGANDA TOGO KENYA BENIN REP. OF THE CONGO GABON DEMOCRATIC RWANDA São Tomé and Principe REPUBLIC BURUNDI EQUATORIAL OF THE CONGO GUINEA TANZANIA SEYCHELLES COMOROS

BOTSWANA

SOUTH

microfinance insights

nov/dec 2008

MOZAMBIQUE

MA DA

ZIMBABWE NAMIBIA

AFRICA

Mayotte (Fr.)

MALAWI

ZAMBIA

ANGOLA

MAURITIUS Reunion (Fr.)

SWAZILAND LESOTHO

interview

Equitable Finance:

Interview with Dr. James Mwangi Equity Bank, established in 1984, has its eyes set on bringing inclusive financial services to Africa. With capitalization of over US$234m and a gross loan portfolio of US$348m at the end of last year, the bank is Kenya’s leading provider of microfinance. This year the Bank bought Uganda Microfinance Limited, and has just announced its entry into Southern Sudan to provide microfinance services. Helen Gale, a UK-based policy advisor and microfinance researcher, interviewed Dr. Mwangi, CEO of Equity Bank, on behalf of Microfinance Insights. They talked about regulatory challenges, expansion plans and Africa’s unbound opportunity.

elen Gale: During your address at last year’s G8 summit in Germany, you said: “Poverty in this country [Kenya] is defined by the banking structure.” Can you explain what you meant and how it relates to microfinance? Dr. Mwangi: Financial systems, and banking specifically, have a role to play through the intermediation of resources. A banking system like Kenya’s is designed specifically to exclude— about 90% of the population does not have access to a bank. If you have no access to resources and you are poor, and there is no mechanism to allow you to access resources, then you are condemned to poverty. That is what you find in Africa. There is no mechanism of redistribution through empowerment. You might have an opportunity, but you have no resources to exploit the opportunity. If you are poor and you are excluded from banking, you remain poor. The current banking system is not available in rural areas. Banks set very high minimum balances—sometimes higher than the GDP per capita—and their charges are too high for the poor to pay. It is a system that has, unfortunately, marginalized the poor even more. HG: So, the banking structure reinforces the poverty divisions in society? Dr. Mwangi: Yes, poor people are denied the opportunity to escape poverty. What has been created is almost a vicious circle where poor people are unable to pull themselves out. The banking sector is designed not to be supportive. Its principal role is intermediation: take from those households that have access and give to those that do not. This intermediation is not at a society or a community level. It is intermediation at a class level, and that is where the problem lies.

microfinance insights

[Traditional banks] only intermediate at a class level, and they exclude the poor. Intermediation should be at a community or a society level. Banking should be inclusive. It should not just focus on a segment (of the population)

“Currently microfinance in Africa is not integrated as part of the financial industry; it comes from a more social or philanthropic perspective.. It is not seen as a part of the financial system, but as a donor extension.” - Dr. Mwangi, CEO, Equity Bank

HG: Let’s turn to Africa. What are the unique challenges and opportunities of doing microfinance in Africa specifically, compared with other regions in the world such as Asia and Latin America? Dr. Mwangi: Let’s start with the opportunities. We have a massive population that has no access to financial services. Only about 1% of the African population – particularly in Sub-Saharan Africa – has ever had a loan or has ever accessed credit from banking. This means almost the whole population becomes a potential market. Second, the strength of the African continent at the moment is sustained growth. Africa has been growing on average at about 5% GDP a year for the last three years. This is creating opportunities, and as opportunities become available, people want credit; they want to be able to save as incomes grow. However, even with these two advantages, there are huge challenges. The first one is legal frameworks. Most African countries do not have enabling legal frameworks for microfinance. Current legal and policy frameworks tend not

nov/dec 2008

to provide for microfinance institutions. The second major challenge is infrastructure. Africa is a sparsely populated continent, where the population is distributed over huge regions without proper infrastructure, such as roads, telephones, and electricity. Setting up this infrastructure becomes very expensive. So, the third challenge comes naturally from the second. If you have a problem of infrastructure, you have a problem of cost. It is expensive to establish a microfinance institution. You have to be able to organize information, but if you want to use computers in most of the regions, you have to produce your own power with a generator. Another major challenge for microfinance in Africa is the high cost of accessing credit. This is not just the cost in terms of interest rates, but more importantly the cost of managing loans in foreign currency. Another real challenge is skills. Microfinance is a highly specialized industry requiring expert financial skills. Africa comes from a NGO/donor-coordinated situation. Trying to convert that mentality of philanthropy to commercialization is necessary but very difficult. HG: Would you say that the nature of these opportunities and in particular these challenges mean that tailored products and services are required for African countries? Dr. Mwangi: What needs to be done above all is adoption of enabling legal frameworks and alignment in terms of policy. Currently microfinance in Africa is not integrated as part of the financial industry; it comes from a more social or philanthropic perspective. You find these problems in government – in some cases microfinance is not dealt with by the Ministry of Finance. It is not

interview seen as a part of the financial system, but as a donor extension. To make progress, microfinance needs to be mainstreamed, to be recognized as part of the banking and financial industry. And then the appropriate infrastructure and involvement will be created.

“We are theoretically becoming a regional institution, and eventually we want to become a continental institution providing microfinance. We want to offer the low-income population in Africa economic opportunities that will transform their lives and livelihoods.” - Dr. Mwangi, CEO, Equity Bank

HG: You paint a picture of donor-dominated microfinance in Africa. What is your perspective on the African investment landscape? Dr. Mwangi: Initially penetration of the African market was by donor organizations. This is how the industry grew up. But, this destroyed and distorted the market. Commercialization was a huge challenge. But this is not surprising because there was no legal framework to create microfinance institutions, nor a policy framework that provided alignment with the financial system. There remains a challenge of providing financing appropriate to Africa specifically. There has been growth in the number of funds in Europe and the U.S. that want to lend to African institutions, but the way that some investors are accessing the market is inappropriate on the grounds that they are trying to create their own microenterprises - in foreign currency. Microfinance institutions in Africa do not have the capacity to operate in foreign currency. Most of the investment funds that loan to microfinance institutions charge even more than those within Europe. MFIs are ill-positioned to manage the risk of foreign currency. If you look at the volatility there has been over the last month, most African currencies have lost over 30% of their value to the U.S. dollar simply because of the current financial meltdown. HG: Kenya experienced quite a bit of political unrest early this year. Was the microfinance sector affected in any way? Have you noticed any reluctance on the part of investors, or alternately, from borrowers? Dr. Mwangi: The important thing to say here is that the Kenyan economy has bounced back, www.microfinanceinsights.com

with an anticipated growth rate of between 5% and 6% in the coming year. That should be a testimony that the economy has not been significantly affected. The impact on microfinance institutions was very limited – we are talking mainly about those institutions that are regional in nature and operating predominantly in the difficult regions. The skirmishes only took place in a few pockets of our country. Out of Equity’s 100 branches, only two were in regions that had violent experiences. I see no significant negative impact on investment in Kenya. Many major investment projects are going ahead – haulage, wireless internet, highways, telecommunications. We see Chinese money, French… We cannot say that investment has ultimately been affected in any fundamental way. Tourism is already at around 50% of last year’s figures. The interruption of about two months has not set the country off its path of growth. There is clear evidence that investor confidence is still high. HG: Equity Bank has just announced it is expanding into Southern Sudan. How is operating in a post-conflict country different? What measures have you taken to start up successful operations there? Dr. Mwangi: It is true that Equity has just obtained the license to start business in South Sudan, and we are now moving to operations stage. South Sudan is an area that is coming out of war, and we recognize and appreciate its history. It has its challenges – setting up offices is not easy, getting staff is not easy—but we hope to be able to make great use of technology. Mobile banking is a major driver of our entry strategy. We have a very light approach. There will not be a wide branch network, probably a maximum of five branches. We will use mobile phone technology to facilitate connectivity with our operations in Nairobi. It is technology that can help make financial services available to poor people, especially in rural areas. HG: Thinking more about technology and innovation, given the lack of infrastructure you have mentioned, all eyes are on developing countries leapfrogging the traditional web technology and jumping straight to a version of the internet that can be accessed on mobile phones. What significance might this have for microfinance? Dr. Mwangi: The internet is of course a great

innovation, but in the least developed countries we still face the real challenge of very high illiteracy levels. This means the internet is not an appropriate medium or channel. The second challenge is the cost. We have talked a lot about infrastructure. Remember that we often still have fiber optic cable linking internet in Africa with the rest of the world. Many people cannot afford to have internet in their home or business. Laptops are priced many times higher than the GDP per capita of most of the African economies. For an African, buying a laptop is the equivalent of a European or American buying a car.

“MFIs are ill-positioned to manage the risk of foreign currency. If you look at the volatility there has been over the last month, most African currencies have lost over 30% of their value to the U.S. dollar simply because of the current financial meltdown.” - Dr. Mwangi, CEO, Equity Bank

HG: Let’s talk more about the main task at hand – poverty reduction. When you established Equity Building society in 1984, I’m sure you never imagined sharing a global award just a couple of decades later with the father of microfinance, Professor Muhammad Yunus (at last year’s G8), and that you’d now be running one of the best performing companies in Africa. What are your plans at Equity Bank for the next decade? Dr. Mwangi: Over the next decade we hope to see Equity increase its coverage significantly. We now have more than 2.8 million account holders in Kenya, about 150,000 in Uganda, and we are setting up in South Sudan, as we have discussed. That is an indication that our strategy and focus now is on increasing outreach. We want people to have as much access as possible. We are theoretically becoming a regional institution, and eventually we want to become a continental institution providing microfinance. We want to offer the low-income population in Africa economic opportunities that will transform their lives and livelihoods. Also, you will likely see Equity becoming more innovative. Innovation is high on our strategic plan. We want to find more ways to reduce the costs and inconvenience of financial

nov/dec 2008

microfinance insights

interview services, and increase access. There will be more investment by Equity in this regard. HG: Access to credit is one thing, understanding finance is quite another. What work does Equity Bank undertake to improve financial literacy among (potential) new users? Dr. Mwangi: I am glad you asked this question. Equity is investing heavily in bringing knowledge into the microfinance sector, and in particular improving learning and entrepreneurship. We have created a consortium group that has been mandated by other banks to provide basic entrepreneurial skills to borrowers. Equity has produced two books, one on how to start a business, and the other on how to manage and grow a business. We sell them to our customers at our branches at cost price, around US$3 . These books are not a line of business; they are to help enlighten microentrepreneurs and help them make their business sustainable. We also run training and awareness programs in partnership with universities – for example, we take students during their vacations to do community service and train people in basic financial literacy. Skills are critical to build capacity.

“The value of remittances is overtaking foreign exchange from exports and even the tourism industry, and is substituting donor aid and foreign direct investment.” - Dr. Mwangi, CEO, Equity Bank

HG: Moving onto the subject of remittances. Equity Bank has begun to pioneer some remittance products for Kenyan Diaspora. How significant are affordable remittances for reducing global poverty? And what are the main obstacles currently blocking progress in this area? Dr. Mwangi: This is an important area. Often the constituents of the Diaspora of a developing country are the cream of their society. They are the most educated of the population, and they move around the world with their knowledge and skills. Typically a family uses all their available savings and/or assets to send their child to have a better life abroad. It is vital that these children remain connected to their families. They can act as role models, demonstrating the value of education and employment. Given the nature of African culture with our extended families, each of us who has

microfinance insights

had an opportunity carries the responsibility, a duty, to share our experience and bring back some of our gains to our home country. One way that the Diaspora can remain connected is through remittances. Equity has come out strong with products and professional support to help Kenyans invest back home. We have acquired a sort of license so that “investors” do not have to rely on brokers or agents. Members of the Kenyan Diaspora have been significant contributors to the growth of the national economy and the growth of the Nairobi stock exchange. The value of remittances is overtaking foreign exchange from exports and even the tourism industry, and is substituting donor aid and foreign direct investment. Again, we need to find the right mechanisms. Of course not all remittances are investments; many are social payments to support households and families. The problem is that they are still very expensive and difficult to process. We need to make it as convenient as possible to send money back home, and we need to ensure that it costs as little as possible, so that the charges do not constitute a significant proportion of a family’s income – especially as we are often dealing in small amounts. At Equity, we have invested in internet banking for Kenyans overseas, and we are working with agents across Europe to improve remittances products. We are also working in partnership with a major money lender to increase affordable services across Kenya – once we connect to their system we will become a major distribution network. HG: Let’s finish by looking ahead to the future. Equity recently acquired Uganda Microfinance Ltd (UML). Do you see more of these kinds of mergers and acquisitions occurring in African microfinance in the future? What other developments do you predict will have the greatest impact on the future of microfinance in Africa? Dr. Mwangi: I think mobile banking provides a very possible solution. Cell phones in Africa are affordable, at around $20. Again, it is vital we have the right legal framework to allow for electronic banking through the mobile phone. That would be a major innovation. The fact that there are nearly 13 million cell phones in Kenya but only around 5 million bank accounts shows the potential in what we can do to extend financial services to those who are currently excluded.

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This is what we hope to achieve with our new service, Eazzy 24/7. On the M&A front, I can speak only for Equity. Our focus is on operationalizing our merger with UML as well as our expansion into South Sudan. Let me finish by reminding you that we have 2.8 million customers in Kenya, a network of 100 branches country-wide, and 4000 Kenyans in our employment. About a month ago The African Investor declared us the best performing stock out of 100 top companies, and at the recent World Bank meeting in Washington the African Banker named us best microfinance bank in Africa. We want to grow our service to the African people. n

Congratulations! Jitendra Sharma,

NIILM Centre for Management Studies, INDIA

J.M. Mehta,

The Bridge Public Charitable Trust, INDIA

Microfinance Insights announces the lucky draw winner for the award winning book ‘Out of Poverty’ by Paul Polak, worth US$27.95. The draw was held for subscribers that renewed their subscriptions within a limited period.

commercialization

Intersection of Microfinance and Capital Markets in Africa Emerging markets have steadily gained popularity as an investment destination offering superior returns. Yet, to a large extent, Africa has stayed off the investment radar, with only the Chinese as of late tapping into the continent’s potential. Blue Financial is one of the Africa’s most aggressive microfinance banks. Unlike other financial services stocks, Blue’s share price has not plummeted during the recent financial gloom and doom. Rather, it is up almost 400% since they listed on the AltX Exchange in South Africa two years ago. In this article, Wessel Smith, a Director at Blue, explores the growth in capital markets involvement in Africa and makes a case for increased investment in microfinance on the continent, while offering a view of the ideal regulatory environment.

s the U.S. sub-prime crisis rips through international capital markets, emerging markets have stood their ground remarkably well, contrary to the 1998 crisis which threw Asian markets into turmoil. Indeed, those who advocate emerging markets as the new “safe haven” are gaining credence on the back of some powerful evidence. As Gray Newman,1 Managing Director and senior Latin America Economist at Morgan Stanley pointed out, “Unlike the 1998 turmoil, problems caused by ‘sub-prime’ didn’t start with emerging markets.” Newman has found that many emerging markets have much stronger balance sheets than they did in 1998. While the 1998 crisis was caused by poor emerging market fundamentals, today’s crisis is a result of poor fundamentals originating from developed economies. Blue Financial Services (Blue) believes that emerging markets are the eye in the calm of the storm of tormented world economies. In contrast to the popular belief that Brazil, Russia, India and China (BRIC) are the most promising emerging markets, we believe that the potential of Africa is not fully appreciated and has been largely ignored. Africa has turned a corner and although a few countries are still struggling, a majority have performed consistently in recent years. While Africa will probably not entirely escape the consequences of the latest economic catastrophe, it will likely weather the storm, which should serve as an endorsement of its potential. The time has come for the world to realize the “Dark Continent” has found its place in the sun and that BRIC should actually be BRICA. www.microfinanceinsights.com

Why is Africa the Underdog? While the world around it has boomed, Africa has served as a mineral treasure house for developed countries. Sadly, many of Africa’s resources have found their way to manufacturing concerns on other continents, slowing the development of its own industries. Most employment opportunities created in the past few decades have been low income, manual labor jobs. As a result, the average man’s economic needs have been limited by a lack of disposable income in a subsistence economy. Banking in Africa has functioned on a correlated trajectory. Banks have largely focused on industry and its offspring, rather than the earning ability and disposable income of the average person, rarely taking them on as clients. The tide has however turned; in its 2007 report, the World Bank states that Sub-Saharan Africa saw GDP growth of 6.5% in 2006, the highest rate in decades, thanks in part to investment in natural resources attracted by surging commodity prices2. If growth is better than ever, why is Africa, and more specifically Sub-Saharan Africa, perceived by so many to be one of the riskiest places to invest? When considering the above, it is difficult to fathom why Africa and more specifically SubSaharan Africa is perceived by so many to be one of the riskiest places to invest. It does however need to be emphasized that Africa has unique challenges. The 2007 World Bank report indicates that entrepreneurs list the major constraints to doing business in Africa as: access to finance, infrastructure, institutions, and skills.3 It is signif-

icant that political instability and lack of proper regulation are absent from this list. What drives growth in the African Microfinance Industry? The simple answer to this question is that demand outstrips supply. To date, the average African citizen has had very limited access to any form of financial product. Those that are banked often only have access to savings and deposits and no other form of financial assistance. The concept of microfinance is not new in Africa. NGOs and other institutions have been offering loans for decades. However, because of the way they operate—often working with groups of people who do a similar activity— their products don’t always meet the needs of those who require their services. To qualify for subscription, borrowers normally have to engage in a common activity; for example, all tobacco growers in a specific region might save a portion of their income with a specific MFI or cooperative, and based on this they would be entitled to access their common savings through loans. Typically, these activities have been restricted to the self-employed. Low-income salaried employees have been excluded from programs like these. They are not necessarily the poorest of the poor; however, they are not bankable in a conventional sense. Different MFIs for Different People Require Different Funding It is important to realize that there are several different kinds of MFIs. Africa is littered with ex-

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microfinance insights

commercialization amples of donor-funded microlending entities. But, there is also a new breed of microlender that participates in the industry for gain. The former have often failed due to the lack of commitment to create economically viable business models— but they usually have the ability to reach the most rural and poorest borrowers. The latter, of which Blue is one, have to mind their bottom line, cover the cost of their funding and operating expenses, and realize profit. Each model has its drawbacks. The lack of accountability of donor-funded MFIs often leads to weak administrative processes and an irresponsible attitude toward the collection of loan repayments from beneficiaries. As a result, the lending enterprise cannot attain independence and must constantly seek donations. The cycle creates a culture of non-payment. Some donor-funded MFIs have been successful, and continue to depend on donor support to provide services to the poorest of poor. For commercial MFIs, risks have to be carefully monitored and clients must not be overextended as this ultimately leads to default and higher costs. The poorest of the poor cannot be serviced by this commercial sub-sector. Intersection of Microfinance and Capital Markets As microfinance in Africa matures, we will see a more defined intersection of capital markets and microfinance. As African economies develop, the participation of African-based entities that invest in microfinance increases. However, the rate of this organic growth still lags behind the demand in the market; as a result, unlocking Africa’s potential still depends on foreign direct investment. The prospect of investing in this market presents an interesting business proposition for the investor. While making a decent return, the investor can play a significant role in the eradication of poverty and the development of economies. A number of foreign investors have discovered this double-benefit, as confirmed by Deutsche Bank Research4 which reports that socially responsible investments (SRIs) rank high on investors’ agendas. By definition, SRIs strive to consider both financial return on investment and its social, environmental and ethical consequences. Social investors, once the domain 1. 2. 3. 4.

of foundations and NGOs, now increasingly consist of professional institutional investors including pension funds, insurance companies and private equity. Access to Capital To remain economically viable and provide products that clients can afford, it is important that MFIs secure funding at reasonable rates, and endeavor to follow the age-old adage of borrowing long and lending short. The sustainability of commercial microfinanciers is a function of sourcing capital at a low rate and ensuring that non-performing loans are kept to a minimum. For this reason, Blue has sourced long-term funding (5-7 years) in international markets. From our experience, there is a definite appetite for emerging market investment, but due diligence processes and approvals are protracted. To address this, we sourced local facilities in each country of operation to supply bridge financing. Most commercial banks, as well as international players such as Standard Chartered, are willing to supply facilities. Subsequent to sub-prime, this landscape has changed dramatically. While international funds still show investment appetite, the horizon has contracted to shorter terms and rates are inevitably higher. Blue is of the opinion that collaboration in the industry is a catalyst for growth, with the enduser as ultimate beneficiary. Because Blue does not disburse cash payments on its premises, we partner with commercial banks such as Standard Chartered, who will open a bank account or honor a Blue check or promissory note. This way a large section of the unbanked population is able to take the first step towards accessing mainstream financial services. Regulatory Environment To put it lightly, there remains room for development of the African regulatory environment. Existing regulations primarily focus on entities that take deposits from clients. This leaves lending

activities and institutions in a vacuum, allowing unscrupulous operators to extend clients beyond their means or cover up balance sheet information. While we do believe that microfinance will thrive in countries where the government keeps out of financial markets, there is a need for governments to pass enabling legislation for credit. Interest rates should be determined by the market. In most countries, if the lending sector is not regulated, financial service providers are usually required to register with a general regulatory body such as a central bank. These regulators normally have wide-ranging powers including the ability to refuse the renewal of/or to suspend licenses. These regulators should use the scope of their authority to remove offenders from the market, irrespective of specific regulatory powers. Although this is stopgap measure, it can prevent industry anarchy. With international attention on the microfinance sector, we do see the tide turning on the regulatory front. Most countries which have no specific lending regulations are currently in the process of developing regulation. The Perfect Bottom Line Effective and ethical microfinance is potentially a visionary means of opening access to finance for all of Africa’s people. It can be the perfect double bottom-line investment, delivering both social and financial returns. Not only a vital tool for poverty alleviation, microfinance features consistent financial returns, low default rates and a sorely needed form of diversification for large portfolios. Importantly, it is the first “bottom up” type of financing that enables poor people to work hard to help themselves, rather than the blunt and enormously wasteful “top down” instruments of aid and debt relief that have mostly just helped the rich and the well connected to get richer. n

Wessel Smit joined Blue as a director and its in-house legal representative in 2005. Previously, Smit has worked as the head of the legal department of African Bank and Unity Financial Services. Smit practiced as an attorney before becoming involved in the micro-lending industry in 1995. Smit regularly presents at forums on microfinance, most recently at the Harvard Business School’s 10th annual African Business Conference.

Newman, Gray and Luis Arcentales. “Emerging Markets: Emerging Questions.” Morgan Stanley Global Economic Forum. August 28, 2008. Honohan, Patrick and Thorsten Beck. Making Finance Work for Africa. Washington: The World Bank, 2007. Honohan, Patrick and Thorsten Beck. Making Finance Work for Africa. Washington: The World Bank, 2007. Dieckmann, Raimar. “Microfinance: an emerging investment opportunity.” Deutsche Bank Research. December 19, 2007.

microfinance insights

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crisis

A Losing Battle:

Zimbabwean Microfinance in the Face of Hyperinflation The Zimbabwean economy is currently suffering from an economic seizure of epic proportions. For the past two years, the country has experienced high levels of inflation, climbing from 1,000% in 2006 to 231,000,000% in July. This summer, it seemed that Zimbabwe was a country of billionaires. In August, the government devalued the currency by chopping off 10 zeros. How are microfinance institutions and borrowers coping? Jannine Versi, a 2007-2008 Fulbright Scholar studying microfinance, reports.

“Z

imbabwe is in the grip of one of the great hyperinflations in world history. The people of this once proud capital have been plunged into a Darwinian struggle to get by. Many have been reduced to peddlers and paupers, hawkers and black-market hustlers, eating just a meal or two a day, their hollowed cheeks a testament to their hunger.” 1 This excerpt from The New York Times in early October speaks to the dire conditions presently facing the majority of Zimbabweans. It comes as no surprise then that in this environment of economic instability and relentless hyperinflation, that Zimbabwean microfinance is all but dead.2 The definition of inflation is a rise in the prices of goods and services, often caused by an increase in the money supply unmatched by organic economic growth. Hyperinflation, typically associated with mass money printing, is inflation on a rapid scale. During such a period, currency can lose value and costs can rise in a matter of hours, as Zimbabweans have painfully witnessed lately. One visitor to the country last year remarked that “huge bundles of money” are required to make basic purchases and people rush to shops to spend the money they have before it loses further value.3 There are frequent parallels between Zimbabwe now and Weimar Germany in the 1920s when hyperinflation resulted in people exchanging wheelbarrows full of German Marks to buy loaves of bread. In 2005, the International Year of Microcredit, the April issue of the United Nations Capital Development Fund’s newsletter featured an article about the success of the Commercial Bank of Zimbabwe (CBZ) in implementing and expanding microcredit initiatives across the country. At that time, CBZ’s microfinance unit had over 3,000 active clients, a portfolio of US$32m and, www.microfinanceinsights.com

moreover, 90% of its portfolio was financed from clients’ savings.4 Three years later, the once-bright future of Zimbabwean microfinance is extremely dim. According to Mr. Xavier, 5 who once managed six CBZ branch locations in Zimbabwe, a branch office that served 5,000 active clients per month in the days before hyperinflation hit is now lucky if it sees even fifty borrowers. Enumerating the myriad challenges facing microfinance clients and regular Zimbabweans alike, Mr. Xavier points towards inflation primarily but also to the shortage of cash (Zimbabwean dollars and foreign exchange), frequent electricity cuts, and scarcities of food and commodities among other goods. Hunger, starvation, disease and desperation are all on the rise. Even if microfinance institutions are still making loans to clients, an extremely rare practice these days, their borrowers face tremendous difficulty in trying to cash checks from the MFIs or withdraw cash from their bank accounts. The Reserve Bank

Published with permission from www.sokwanele.com

has imposed daily maximum withdrawal limits. Mr. Xavier relates that in August, the withdrawal limit was Z$200, equivalent to about US$1; today, it is around Z$50,000 (US$2.50). 6 Invariably, the permissible daily withdrawal limit falls short of the amount needed to buy the inputs necessary to keep an enterprise running. Mr. Xavier illustrates with an example: the small amount of money that a borrower might need in order to buy a few meters of cloth to use in her clothing or tailoring business would take close to two weeks to withdraw from a bank. “One cannot run a business professionally; profit is impossible as prices change constantly – daily or even hourly,” he says. Half of Zimbabwe’s registered MFIs have closed and surrendered their licenses, said the Reserve Bank of Zimbabwe governor, Dr Gideon Gono, in an article in the Herald, the government’s official newspaper, in August.7 The remainder struggle to advise their dwindling clientele on how to cope since microfinance is

Holding Fort Shortly before we went to print, we spoke to Ms. Virginia Sibanda, Managing Director of MicroKing, one of the only remaining MFIs still in operation in Zimbabwe. Sibanda elaborated on the situation there: “It has not been easy and there has been a paradigm shift in the manner of doing business. Currently we are working mostly with SMEs. However, we have created a portfolio from our own profitability so that we may continue to reach out to the real poor in the communities. This is not profit-driven; our assessment is on impact on families rather that dollar return. With the SME portfolio, the performance in Zimbabwean dollars is robust enough to meet expenses in Zimbabwean dollars, but when subjected to the US dollar, we are moving backwards. “Currently, our whole book is leveraged and loans are up to a maximum of one month only. We have a core of 1,000 borrowing clients and 6,000 transactional accounts. To fund operations, the business is borrowing from the money market, that is, very short term, and interest rates fluctuate on a daily basis. My strategy for now is to hold fort. We are still making an impact on the poor families and that is the motivation to continue doing the best we can.”

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microfinance insights

crisis essentially untenable in an environment where inflation is so extreme. Mr. Xavier says that one approach taken by the few MFIs still standing has been to give borrowers grants in a certain amount of a commodity – raw materials or food, for instance – instead of cash. With this, they can engage in trade on the black market as a way to sustain themselves and their families. Mr. Xavier continues, “Many borrowers have resorted to black market business, which is more highly rewarding than formal employment or any established business.” For many, it is no longer possible or feasible to deal in local currency at all. Cash loses its value so quickly that bartering in either commodities or foreign exchange has taken its place

in a large informal economy in which the price of goods is always higher. Mr. Xavier voices a common opinion when he blames this parallel black market economy for perpetuating the vicious circle of inflation. Up until now, foreign exchange remains in the hands of individuals who can earn more by peddling it illegally than depositing it in banks. It is difficult to envision a return to the kind of economic stability required for microfinance to begin functioning again. Among other things, it would require the money supply to be reigned in to slow the rate of inflation, banks to shore up their foreign currency reserves, and an increase in consumer confidence. These improvements are unlikely to materialize until political stability is on the ho-

rizon. Last week, the World Food Programme initiated a campaign to raise US$140m to feed five million Zimbabweans, half the population. “Millions of Zimbabweans have run out of food or are surviving on one meal a day and the crisis is going to get much worse,” said the regional director.8 Until then, the informal economy will continue to grow, the cost of goods will rise commensurately, and ordinary Zimbabweans will join the ranks of the poor and financially underserved in alarmingly high numbers. n

Jannine Versi is a 2007- 2008 Fulbright Scholar studying microfinance in India.

1. Dugger, Celia W. “Life in Zimbabwe: Wait for Useless Money.” The New York Times.October 2, 2008. 2. Dugger, Celia W. “Zimbabwe: Inflation Rate Spirals Higher Still.” The New York Times.October 9, 2008. 3. Jena, F. “The Poor Millionaires of Zimbabwe.” Accessible online at http://microfinancegateway.org/content/article/detail/42711 4. Mandivenga, Dyson Z. “Zimbabwe’s Third Largest Commercial Bank Promotes Microfinance....” Issue 11. April 2005. 5. Name has been changed. Our source agreed to discuss the situation only if not quoted by name. 6. “A Day in the Life of Hyperinflation: Zimbabwe.” IRIN Humanitarian News. October 15, 2008. 7. “Zimbabwe: Microfinance Institutions Hit By Viability Concerns.” Herald (Harare). August 5, 2008. 8. McGreal, Chris. “Mbeki urged to save Zimbabwe coalition deal as inflation soars.” The Guardian. October 10, 2008.

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microfinance insights

nov/dec 2008

crisis

The Silent Tsunami:

The Role of Microfinance in the Global Food Crisis Over the last year, the world has had to come to terms with the spiralling cost of basic food commodities such as rice, wheat, pulses and vegetables. This has been largely due to rising cost of transportation, fertilizers, and the proliferation of competing crops. Some fear that rising costs could potentially push a large number of people back into poverty, undoing the progress made thus far. The World Food Programme (WFP) has been leading the efforts to bring innovation to the process of food production and distribution. In this article, Josette Sheeran, Executive Director, WFP, tells us how microfinance can help combat what she calls the “silent tsunami.”

unger is on the march around the world, fuelled by record high food and fuel prices. Last year alone, 75 million joined the ranks of the “urgently hungry.” Today almost a billion people struggle to find their next meal, and every six seconds a child dies from hunger-related causes. The World Food Programme (WFP) has taken a bold approach to addressing this challenge, launching a revolution in food aid to ensure that food aid itself is a productive investment in hungry societies, and helping small-scale farmers break the low-yield trap and access markets with their products. This is critical to breaking the cycle of hunger at its root—up to half of the 90 million urgently hungry WFP will serve this year are farmers who cannot even raise enough food for their own families. WFP will do this by directing the purchase of food aid to small-scale farmers. Today, WFP spends 80% of its cash on food, procuring commodities from up to 70 developing nations. This year alone, more than US$1bn will be purchased. In a US$77m project launched with the Bill & Melinda Gates Foundation and the Howard G. Buffett Foundation called Purchase for Progress (P4P), WFP will explore ways to purchase food directly from smallscale farmers in a way that allows them to access credit, mitigate risks and access markets so they may escape the poverty trap. Addressing the lack of rural microfinance tools – including micro credit and micro insurance – will be key to the success of this plan. This has the potential to link life-saving emergency food to a powerful engine for long-term development. www.microfinanceinsights.com

A World of Risk The hungry poor live in risky environments. They face natural disasters, such as droughts, floods, cyclones, earthquakes and pests. They face diseases and market shocks, such as price changes. Their life on the edge makes them risk averse because they cannot chance falling deeper into hunger and poverty. As a result, they stick to proven, but low-income activities and avoid adopting new (but risky) technologies. This means that poor farmers, particularly those in rural areas, become entangled in a semi-subsistence poverty trap, where they do not have access to new technologies in order to produce a marketable surplus.

“One particularly perverse consequence of the lack of financial services is the need for lowincome farmers to sell part of their crop during harvest time at low prices because they need cash and cannot get it from banks.” Rural farmers are particularly subject to the risk of market and crop failure. Local markets for fertilizer, seeds or tools, even where they exist, are beyond their reach. When small-scale investments are made by farmers, the returns can be low, even negative, due to low prices. These low prices are often evidence of structural disincentives, such as high transport costs, a lack of information and limited competition among traders. When disasters strike (and they have with increasing frequency in recent years), markets become even more volatile. For these reasons, in ru-

ral communities risk itself has become a difficult conundrum solve. One solution may lie in increased collaboration between microfinance institutions (MFIs) and the WFP. Through P4P, we will, for the first time, offer secure forward purchase contracts of up to a three-year duration, with the intention of reducing risks and assisting the hungry poor to escape the poverty trap. For this approach to succeed, it should be combined with microfinance facilities, which could provide loans secured against the forward contracts. This is one example of how MFIs and WFP could benefit from enhanced cooperation and new synergies, helping to break the vicious cycle of low prices, low investments and poverty. Without Access to Finance, the Poverty Trap is Deeper The hungry poor often lack access to financial services, such as credit, savings and insurance. In Sub-Saharan Africa, only four percent of the population owns a bank account. There are several reasons for the lack of access to financial services. Foremost is the fact that banks are often completely missing in rural areas of developing countries. Formal financial institutions prefer urban areas due to higher incomes, and lower costs and risks. Without access to collateral and credit, insurance and a safe place to put some money, it is difficult for poor households to invest, buy inputs including seeds and fertilizers, and cope with shocks, such as the death of an animal, a sick child or high food prices. One particularly perverse consequence of the lack of financial services is the need for low-income farmers to

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microfinance insights

crisis sell part of their crop during harvest time at low prices because they need cash and cannot get it from banks. They are even likely to buy back the same staple food at high prices a few months later, when their stocks run out. This “sell-low-buy-high” phenomenon is widespread and deprives farmers from a significant amount of income. With the absence of financial services, the hungry poor are deprived of a coping mechanism. Exclusion from credit and insurance also reduces their ability to survive income or price shocks and keep food consumption at adequate levels. Access to financial services plays an important role in reducing and transferring the versatile risk the hungry poor have to deal with. The microfinance revolution has generated a stream of innovations in the area of financial services, addressing widespread market failures and providing financial services to poor households. Innovating to Adapt to a Changing Environment WFP’s Strategic Plan is a response to the changing nature of hunger and the rapidly evolving environment in which WFP operates. It marks a historic shift from WFP as a food aid agency to WFP as a food assistance agency, deepening and broadening our analysis of the root causes of hunger and bringing a variety of tools – in addition to food transfers – to address those causes.

ing their production because of the risk that they will not obtain a return on their investment through sale of their produce. As a result, their returns are usually low. Providing a more secure market allows farmers to break the poverty trap.

“Moreover, transportation costs have increased because of high energy prices, increasing the costefficiency of procuring food close to the areas where it is needed.” Under P4P, the WFP will work with partners in the UN, NGOs and the private sector to explore ways to better use its purchasing power to support low-income farmers. The objective of P4P is to enhance the impact of WFP’s procurement of food commodities in developing countries on smallholder farmers—the majority of whom are women—so that they will face lower risks, sell crops at a fair price, and invest and increase their incomes. The ultimate goal is to use lessons learned from P4P to guide all of our commodity purchases, ensuring food aid becomes part of the long-term solution to hunger. We also intend to share our lessons learned in “development-oriented contracting” with private sector food purchasers and encourage them to adopt similar models. High food prices have increased the

“Farmers often do not invest in increasing their production because of the risk that they will not obtain a return on their investment through sale of their produce. As a result, their returns are usually low.” In fighting hunger, WFP assesses, analyzes and determines the proper response, depending on the context. WFP is expanding three tools specifically: the use of local procurement of food commodities, impacting low-income farmers directly cash and vouchers transfers, and the development of weather-based risk insurance. Connecting Farmers to Markets Farmers often do not invest in increas-

microfinance insights

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potential for local food procurement as domestic prices do not always keep pace with international prices. Moreover, transportation costs have increased because of high energy prices, increasing the costefficiency of procuring food close to the areas where it is needed. P4P draws on a number of innovative mechanisms including forward contracts, warehouse receipt programs and support to value added, local food processing. In a warehouse receipt system, farmers store food in registered warehouses in return for receipts, which, when backed by legal provisions, can serve as collateral for a loan from a financial institution. A forward contract entails an agreement between a farmer and processor or trader to supply a specified agricultural output at a future date at predetermined prices. Again, when backed by legal provisions, these contracts can serve as collateral for loans. There are many examples of local entrepreneurs’ or farmers’ associations investing in processing facilities for which WFP can assist by purchasing the finished product. This provides value added to local production and can benefit nutritional status when food processing facilities fortify food products with micronutrients. WFP has long and extensive experience buying food commodities in developing countries, which provide the investment

How High Prices Add to World Hunger Toll Asia/Pacific: 41m

Sub Saharan Africa: 24m Near East/ North Africa: 4m

Latin America/ Caribbean: 4m

75m of the world’s hungry are direct result of high food prices (FAQ est). Total undernourished in world: 923m Source: BBC World, http://news.bbc.co.uk/2/hi/in_depth/7284196.stm Graph added by Microfinance Insights Editorial Team

CRISIS base to enter into the P4P approach. In 2007, WFP procured more than US$612m and 1.6 million tons of food in 69 developing countries. In Africa alone, WFP procured 5.3 million tons between 2001 and 2007, amounting to US$1.5bn in 2007 prices. Moreover, WFP locally buys the transportation and warehouse services it needs, providing a further stimulus to the local economy. This shows the tremendous potential for productive partnerships as the optimal use of the P4P mechanisms depends on the support of credit facilities provided by MFIs. Cash and Voucher Transfers Cash and voucher transfers play an important role in reducing the risks households face, although most programs have been fairly small-scale and lasted only a few months. Predictable transfers, such as those provided by the Productive Safety Net Programme in Ethiopia , a government-implemented social transfer program funded by some Western governments, the World Bank and the World Food Programme, can provide poor people with the confidence and sense of security needed for investing and engaging in income-generating, but potentially risky, activities. Cash transfers provide people with money to buy food. Vouchers provide people with coupons to purchase a fixed quantity or value of food in pre-selected shops, which shopkeepers can then redeem at local banks, with which agreements have been made. Cash and voucher transfers are not always appropriate and feasible. The factors that affect the appropriateness and feasibility include program objectives, market functioning, implementation capacities, cost efficiencies and beneficiary preferences. Another important limitations to the expansion of cash and voucher transfers is the presence of financial institutions, which influence implementation capacities and cost efficiency. Weather-based Risk Insurance WFP has assisted countries in the development of weather-based insurance products, where the trigger for a disbursement is based on a rainfall index. In 2006, the WFP piloted such an insurance policy in Ethiopia, and is assisting other governments in designing and piloting drought www.microfinanceinsights.com

and flood risk management instruments. Index-based risk financing heralds an innovative and effective way for assisting poor people whose livelihoods are threatened by extreme weather conditions and natural disasters. A thriving market for weather index-based insurance and pilots is currently developing, and will only become more important as climate change inevitably leads to a rise in weather-related catastrophes. Potential Synergies WFP is learning to be more focused on What is a Warehouse Receipt?1 The idea behind warehouse receipts is to have producers store their grain in secure warehouses and use the warehouse receipts as collateral for obtaining credit for immediate financial needs. A certified warehouse management firm keeps the grain in a secure warehouse so that farmers can sell their grain later in the year and benefit from increased grain prices which usually occur several months after the harvest. 1 “Launch of the Warehouse Receipt Program.” USAID. April 25, 2008.

hunger solutions within the humanitarian challenges we face, but we need partners to solidify and expand our efforts. P4P, cash and vouchers transfers, and weather-based insurance are dependent on an array of partners, with MFIs of primary importance. Innovations have been at the core of the microfinance revolution. It has served the hungry poor well. Yet, more needs to be done. Areas where collaboration between MFIs and WFP could increase include: • Accepting of food-supply contracts and warehouse receipts as collateral for loans • Providing financial services in remote rural areas, including innovative savings and insurance products • Implementing weather-based insurance products • Capacity development in financial literacy • Providing financial services and training to farmers’ associations I would like to appeal to the microfinance community to keep innovating and encourage MFIs to work with WFP, to link to P4P, and create new ways to address these challenges, including the risk conundrum. Together we can do it. Together we are much stronger. 

Watch the webcast of our “Indian Microinsurance: What Works?”event. Visit www.microfinanceinsights.com

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Housing Microfinance in Africa: State of the Industry

Africa is the fastest urbanizing continent in the world. By 2030, 50% of sub-Saharan Africa’s more than 1 billion people1 will live and work in towns and cities. Housing microlending is becoming an exceedingly important product as certain governments struggle to find permanent homes for slum dwellers and those migrating to cities. Through a pro bono project for Unitus, a team of volunteers from Barclays Capital dissects the state of housing microfinance in Africa and offers examples of several product offerings tried across organizations and countries.

ccording to UN-Habitat, the United Nations arm that examines human settlement patterns, currently two-thirds of Africa’s urban population lives in informal settlements without adequate sanitation, water, transport or health services.2 Research conducted by Kituo cha Sheria, a non-governmental organization (NGO) in Kenya, and other civil society organizations show that although government programs promote home ownership, most urban households can only afford to rent. Even if decent housing is made available to urban poor, most cannot afford it.3 A 2003 UN report on slums confirms these results. Although relocating slum dwellers has been tried many times, UN-Habitat suggests that in-situ slum upgrading improves the lives of slum dwellers more than resettlement.

from granting loans to these populations. Land ownership is also a significant issue in Africa, as many inhabitants cannot provide legal or documented title for their homes and land. Many properties are claimed communally by rural tribes and urban communities, but in unstable political environments (in particular countries), land ownership and rights can be disputable. As a result, individuals and groups cannot use property as collateral for housing finance. This limits lender protection against default, thereby increasing reluctance to lend. In South Africa, some commercial banks are reluctant to make new housing loans to lower-income borrowers because the HIV/AIDS pandemic is raising default risk. In response to this reluctance, the Home Loan Guarantee Company (HLGC) of-

Risks to Housing Lending African slum dwellers typically have short-term entrepreneurial, rather than long-term formal sector, employment. This lack of secured employment creates additional risk to repaying housing loans and deters traditional lenders

“Progressive building is valuable for slum-dwellers and other borrowers without land title or collateral, as it builds often upon existing structures and involves less credit risk.”

fers select institutions insurance against such default. Housing Trends: Progressive Building Housing microlenders have been more successful with “progressive building” loans than with more traditional loans to build or purchase complete structures. Whereas traditional housing loans disburse a single, large amount that is repaid over many (often 15-30) years, progressive building consists of a series of smaller loans with shorter payback terms (12-18 months). Clients receiving these loans can build or make housing improvements in stages via flexible repayment systems, keeping terms and payments manageable, mitigating default risk.4 Progressive building is valuable for slum-dwellers and other borrowers without land title or collateral, as it builds often upon existing structures and involves less credit risk (reducing need for collateral). Progressive building can also allow clients to build credit history and lending organizations to better manage risk. Additionally, lending can be in the form of building materials instead of

Case Study I: South Africa’s Kuyasa Fund The Kuyasa Fund is a small non-profit housing micro-lender based in South Africa’s Western Cape. It makes small loans to savings and credit groups (gooi-goois, stokvels, etc.) without requiring asset-based collateral. Merits The fund assists low-income households in Cape Town to build larger and higher quality houses than the government subsidy provides. At the end of July 2006, Kuyasa had distributed R24 million (~US$2.4m) to ~5,000 clients during its six years of operation. Specifically, the interest rate in 2006 was 32% per year, compounded monthly and fixed throughout the loan period. As of 2006, Kuyasa self-funded 85% of its operational costs (up from 17% when it began in 2000), with the remainder funded by donor organizations. Average loan size is R4,000 (US$403), the minimum loan available is R1,000 (US$100) and the maximum is R10,000 (US$1,007). Loan terms range from 3 to 30 months. Security of 10% of loan amount is required via savings deposits. As of 2006, only 35% of savings group members had yet to receive a loan. In 2006, Kuyasa’s bad debt write-off was 17%. Lessons Learned Kuyasa shows a successful model of improving operational efficiency and significantly growing a housing microfinance business.

microfinance insights

nov/dec 2008

products

Housing Microfinance Product Comparisons – Africa MFI

Product Features

Interest Rates (Annual)

Boafo Microfinance Services Ltd. (Funded by HFC Bank [Ghana] Ltd), Ghana

Loans secured by a combination of guarantees, including co-signers and salary deductions

Not published

$500 $10,000, not published

At the end of three years, Boafo plans to be profitable, with a portfolio of $3.4 million including $1.1 million in housing loans (1H07 is when the organization is beginning loan service)

Centenary Rural Development Bank, Uganda

Salary loan that can be used for housing offered individually to borrowers who have 1+ yr employment and a savings account with bank.

Not published

up to Shs 25 million, up to 2 years

Profitable

Kenya National Housing Corporation, Kenya

Individual rural housing loans, pro- Not published vide housing plans & advice. Borrower must have 50% of house already constructed, steady income, and land title as collateral

up to Ksh. 200000, not published

Non-profit organization

K-Rep Bank, Kenya

Group-based loan

15%

$385 - $3300, up to 5 years

Information on housing product seems unavailable; overall MF operations profitable

Kuyasa, South Africa

Unsecured group-based loan, security from requiring individual borrowers to have 10% of loan in savings deposits

32%

R1,000 R10,000; Average R4,000, 3 months - 30 months,

Overall yes, but receive donations to cover operations

National Cooperative Housing Union, Kenya

Resettlement Loan for Cooperative members; NACHU retains land title until all members paid their share

15%

$705 per quarter-acre lot, up to 4 years

Non-profit organization

currency in order to ensure proper use of loans. Building materials can be provided by supply companies or by the organizations offering housing loans in advance of payment. For example, the Overseas Private Investment Corporation (OPIC) provides housing finance to low-income South Africans and introduces borrowers to cost-saving methods and materials. Alternatives to Land Collateral Due to the lack of land ownership evidence that would facilitate real property liens, as well as the fact that the poor have limited wealth beyond their land and homes, African lending organizations have found alternative methods to protect against housing loan defaults. These include group liability approaches and savings processes to build credit relationships. Successful housing lending utilizes “relational” security models and builds upon cooperatives already established by MFIs (where citizens must set up in groups and individual borrowers’ loan repayments determine future collective ability to obtain capital). Just as with traditional microfinance, relationships among borrowers and www.microfinanceinsights.com

Loan amount and term

Profitability

between the lender and the group can replace the asset-based security model typically used with mortgages.5 For example, the South African Rural Finance Facility uses group lending to compensate for lack of land collateral. The traditional MFI model can also prepare borrowers for housing loans through savings vehicles. Groups are established to encourage or mandate regular savings deposits from members. These groups help borrowers develop and demonstrate responsible behavior around personal finance that helps to qualify these borrowers for housing loans. Savings groups also can establish a pool of capital to commit against individual loans. Minimizing Risk via Diversification Another helpful approach to protect institutions engaging in housing microfinance is diversification, especially client, location and product diversification. To reduce the risks of housing microfinance, an organization can offer housing finance to the public at large and select qualified borrowers from various income levels, of which only some are low-income. This “hard credit”

method aims at the full recovery of operating costs plus capital and is more commercially scalable.6 Financial Bank in Benin, West Africa is an example of a commercial bank that expanded into low-income markets and ultimately spun off the MFI Finadev as a unit offering housing microfinance. Housing microfinance risks can also be mitigated by combining home loans with other financial products. As an organization diversifies its loan portfolio to consist of business and general purpose loans, as well as savings products and insurance offerings, the risks from default from a single loan type are compensated by other positive cash flows. Microfinance institutions that offer African communities many capital solutions are likely to be the most successful. For example, the MFI K-REP has a diversified loan portfolio that includes housing products. Government Alliances Many national governments recognize the social and economic problems associated with inadequate housing, especially in urban areas, and have created initiatives, such as building subsi-

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microfinance insights

products dies or municipal housing, to help low-income populations. Lending organizations that have recognized the strengths and weaknesses of these governmental offerings and developed microfinance products to work alongside them have proven successful in Africa. Some of the underserved poor in Africa qualify for governmental subsidies but cannot afford the housing offerings from government

contractors. New organizations have arisen that offer technologies and services to build or make housing improvements at lower costs and greater efficiencies, which allows communities to take advantage of such government programs. Efficiently managing building material costs and accessibility, as well as utilizing subsidies offered by governments, can be extremely helpful to the poor. n

1. http://www.idrc.ca/en/ev-84260-201-1-DO_TOPIC.html 2. http://www.citymayors.com/society/urban_africa.html 3. http://www.un.org/Pubs/chronicle/2003/issue4/0403p19. asp 4. Practical Guide for Housing Microfinance in Morocco 5. World Bank and Harvard Housing Microfinance Study â&#x20AC;&#x201C; Asia, Latin America, and Sub-Saharan Africa 6. Small Enterprise Development Vol.14 No.1

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This article was prepared by Bhakti Mirchandani, Strategic Planning and Analysis at Barclays Capital; Stephanie Poole, UNC Kenan-Flagler MBA student, Class of 2010; Vishakha Parekh, independent consultant; and with the help of Kylie Charlton, Unitus Capital.

Visit www.microfinanceinsights.com

to read our blog from the Microfinance and New Technologies Summit, in New Delhi

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Funeral Insurance in South Africa “Although relatively few South Africans have a retirement plan or medical insurance, a large number have taken out some form of cover to meet the expenses of being laid to rest.”- Personal Finance, 20071

n South Africa, there are 5.7 million AIDS patients, accounting for an average of almost 1,000 deaths a day.2 Increasingly poor households face enourmous pressure to provide for funerals. According to the Joint Economics Aids and Poverty Programme (JEAPP), the average cost of a traditional funeral ceremony in South Africa is around US$4,900, while the average annual household income US$3,630.3 For many families, money may not be readily available, yet a funeral is a social imperative. A study conducted by TNS Research Surveys in 2006, shows that South Africans are largely willing to forgo other expenditures, in order to buy funeral cover. One option to cover funeral costs is to pay at the time of services. Anderson Lookkin, VicePresident of marketing at Assurant Life, Canada says, “While paying at the time of services or setting aside money in trust for funeral goods and services is an option, the most popular way of pre-paying for funeral costs is through the use of a final expense or a pre-need funeral plan of insurance.”4 In this case , the person nominates a beneficiary to take care of his funeral expenses, and the proceeds are paid at time of death. Under a pre-need plan, the proceeds are paid directly to the funeral home chosen. A new means of obtaining the funds to finance a funeral is through funeral insurance,defined as “an insurance policy, normally written for a small amount, which provides money for a funeral upon the death of the person.”5 In effect, it is a life policy of less than US$900. Derek Pead, CEO of Metropolitan Cover2go says, “Funeral insurance certainly is still the most widely used form of insurance - roughly 36% of the population is covered by funeral insurance.”6 Herman Schoeman, Managing Director of Guardrisk adds, “Some six million people are covered through formal and informal schemes; with premiums of approximatelyUS$62m going to burial societies

and another US$50m going to stokvels (community savings clubs that sometimes also play the role of burial clubs).”7 There are four broad categories of players in the funeral market: • Burial societies: Burial societies are community-specific, membership based, non-profitvoluntary associations that offer emotional and physical support to members and pay a cash benefit to them or their families to cover funeral expenses. There are approximately 80,000 and 100,000 burial societies in South Africa, usually formed by members of a family or kinship group and an average society has 50 to 80 members. In Ethiopia, the funeral associations known as “iddir,” ensure a payout in cash and in kind at the time of a funeral for a deceased member of the family or group. Burial societies offer a form of cash flow management or risk pooling but these benefits are not guaranteed. • Funeral parlors: Although meant to serve as providers of funeral services, funeral parlors, in an attempt to secure a broader market for their services, have diversified their portfolio to include insurance, credit and savings. People enter into financial agreements with funeral parlors beforehand, because they do not want to look for one when a death occurs. • Administrators: An administrator is any person or legal entity that provides intermediary services for any registered assistance insurer8 and often assumes the role of product provider.9 The administrator effectively owns the client, and sometimes only insures part of his book with a formal insurer. The difficulties arise when they move their book from one formal insurer to another without full disclosure to either the clients or the insurer. Yet, they provide services at very competitive prices.

• Formal insurers: A number of formal insurers are active in the market, with some holding only assistance business licenses, whereas others provide funeral benefits linked to life coverage. While there are many insurance providers in South Africa like Metropolitan Cover 2go, KGA Life, Madison Insurance, Guardrisk, etc., it is also interesting to find MFIs and NBFIs expanding their reach in the funeral insurance sector. CETZAM, for example, is an MFI that partners with Opportunity International and offers death and funeral insurance through a product known as Ntula. OI-SASL is a non-bank financial institution and network member of Opportunity International; its credit-life and funeral insurance program targets more than 50,000 people.10 While there are many honest and reputable companies that offer funeral insurance, there are some unscrupulous providers who sell their products at rates much higher than they should. “About 70,000 funeral schemes, of which an unknown number are riddled with unpaid claims, fraud and illegal operators,” says Maureen Marud in her article “Funeral insurance ‘A Dead End’”11 The government is attempting to address this problem by proposing micro-insurance regulation. Insurance Fraudline, a helpline for victims of fraud, allows individuals to report fraud free of charge and anonymously. It is evident that the market for funeral cover is substantial and that it is used by lower-income groups. The market consists of a large number of providers and intermediaries, many of which are effectively unregulated, which raises concerns about the potential for abuse. n -By Vibha Mehta, Associate, Intellecap

1. Moodley, Neesa. “Funeral cover a matter of life or death for many South Africans.” Personal Finance. March, 2007. 2. The South African National HIV Survey, 2005 3. Palitza, Kristin. “Southern Africa: AIDS Puts Funeral Traditions Under Pressure.” Inter Press Service. February 2006. 4. Lookkin, Anderson. “Benefits of funeral insurance”. Financial Post. September 2008 5. http://www.evergreen-washelli.com/faq/terms.html 6. D’Alton, Heather. “Funeral covered? Interview with Derek Pead.” Summit TV. Business Day. September 2008. 7. Schoeman, Herman. “ART structures can breathe new life into ailing funeral insurance industry.” Guardrisk. February 2006. 8. Funeral Microinsurance is currently termed “Assistance Business” in South Africa. 9. Nianaber, P. M. and Preiss, J. “Funeral Insurance: A perception from the office of the Ombudsman for long-term insurance.” SA Mercantile Law Journal 291. 2006 10. www.microfinancegateway.org/resource_centers/insurance/providers 11. Marud, Maureen. “Funeral insurance ‘a dead end’.” IOL News. November 2006

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donors

The Cradle of Mankind:

Helping Microfinance Bloom in Ethiopia In 2001, Philip Berber left his “for-profit” job and joined his wife Donna in the pursuit of “social profit.” Together they started A Glimmer of Hope, a foundation run like a business with the goal of helping the people of Ethiopia. Today, their foundation works with the top MFIs in the country, and in October 2008 it made a US$2m commitment to funding microloans in Ethiopia as part of the Clinton Global Initiative.

n 1984-85, Ethiopia experienced a cataclysmic famine that affected over 8 million people and killed one million. I can still recall the images of the cataclysmic famine that struck Ethiopia in 1984-85, affecting 8 million and killing one million people. The Ethiopian situation has improved since then, but there is still widespread poverty, and very little private sector business development. When my wife and I started our foundation seven years ago, we knew we wanted to focus on this country and its people in an impactful and sustainable way. We began by investing in the basic societal building blocks that were so lacking throughout Ethiopia and by establishing partnerships with indigenous development organizations and NGOs. Over the next few years, we implemented hundreds of water and sanitation schemes and a large number of health care, education and veterinary facilities. The impact of these projects was immediate and profound and we could clearly see the difference they were making in the lives of some of the poorest people in the world. We are always looking for ways to innovate and extend our reach, and given this philosophy, moving into microfinance became a natural progression for us as part of a broader integrated approach to development.

a traditional bank. As the rural population has grown to about 85% the plots have been redistributed, becoming smaller and smaller in an ever increasing number of hands. This makes it hard for farmers to produce enough to feed their families, let alone generate profits against which they can borrow. Ethiopia currently has 29 registered microfinance institutions (MFIs) serving the rural poor with small branch offices in the remotest of communities. The two biggest are DECSI of the Tigray region and ASCI of the Amhara region. The two are the only two Sub-Saharan Africa MFIs to appear on the Forbes “Top 50 MFIs” list (No. 6 and No. 31 respectively). The top four MFIs in Ethiopia all have loan portfolios of US$100m or more and serve approximately 95% of the 1.82 million borrowers. A Glimmer of Hope works with all four: DECSI, ASCI, OCSSCO (Oromiya Region) and OMFI (Southern Region). These organizations have a number of things in common including: • Repayment rates above 96% • Interest rates from 12% to 15% • A wide mix of services to their clients • Strong internal businesses models allowing loan officers to service between 300 and 800 clients each.

Demand for Credit From our experience, the most effective way to help the poor break the cycle of poverty is to give them the opportunity to generate sustainable incomes. To do that, they need access to credit. In Ethiopia alone, there is a demand of some 30 million people for microcredit. Most of these people have no collateral and therefore, do not qualify for mainstream finance. Their financial woes can be blamed, in part, on the current land tenure system, which stipulates that all property belongs to the state. Farmers own their animals, their produce and any improvements they have made to the property (e.g., structures), but they do not have a stake in the land itself. This makes it difficult for them to qualify for a loan from

All the MFIs have deep roots in their communities. To date, there have been few long-term impact studies on microfinance in Ethiopia, but ASCI recently completed a comprehensive Impact Assessment study that analyzes the impact

Focus Areas Ethiopia remains a predominantly agricultural country, but it is almost completely dependent on rainfall, which is inadequate, unpredictable and uneven in distribution. As a result, large segments of the population are exposed to extreme levels of poverty and even food crises, as was the case again this year in Ethiopia, and in many other countries across the continent. Following a successful pilot in 2005, we dedicated our funding to income generation projects, several of which worked to reduce farmers’ dependence on weather and rain for their livelihood. We invested in capital projects such as hand-dug wells, check dams, river diversions and off-take diversions to provide sustainable sources of water for irrigation, and mobilized loans for farmers – men and women – living around those projects so they could purchase small motorized pumps, treadle pumps, drip kits, barrels, fertilizers and high value crop seeds such as tomatoes and garlic. We also funded loans (average loan size of US$300) to marginalized women to start small and medium enterprises (SMEs). The effects have been heartening.

Borrowers in Ethiopia often use loans for agriculture and micro-irrigation.

An Opportunity for Donors Microfinance gives both philanthropists and donors an opportunity to leverage their investment, create scalability and develop economic sustainability. Investors reach an ever expanding number of beneficiaries as their donations are continually reinvested after being recovered in the form of loan repayments. And, for every dollar donated to a microcredit scheme, additional dollars are created in the form of income.

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of their microfinance program. Based on their results, they have found that microfinance creates new generations of savvy business owners in addition to increasing household income, food security, education and savings. The report also found that in areas where microloans were prevalent, there was a marked reduction in child labor practices.

donors At this year’s Clinton Global Initiative conference in New York, A Glimmer of Hope announced a new commitment to provide US$2 million in loan capital for microloans in 2009, of which we have already raised US$800,000 and

plan to fund the balance from the foundation’s endowment. We now know microfinance will continue to play an important role in our work in Ethiopia. We believe combining it with our humanitarian

programs in a synergistic form of development and poverty relief will result in truly sustainable impact. n

On the Wire: A look at the African Remittances Market In 2007, inward remittances to Sub-Saharan Africa totaled US$11bn (roughly 2% of the 2006 GDP for the region1 ), an increase of 95% from 2003. Like many areas in the developing world, remittances from citizens outside the country are an important part of the growth in the local economy and communities - the money helps build the local economy, sends children to school, provides health care, and so on. Today remittances in Africa are facilitated through regular banks, money transfer organizations (MTOs), or through indigenous systems such as the “hawalas” used in Somalia. The effectiveness of each network is, however, limited by infrastructure and demographics. Most Africans do not have bank accounts, and most banks and MTOs do not operate in rural areas. Against this background, MFIs particularly have a strong role to play in facilitating the growth of the market. Because of their rural reach and network, MFIs are often more capable of offering remittance services than traditional players such as banks and MTOs. For the MFI, offering this service makes sense as it allows for cross selling of products and services, and also indirectly benefits them because their customers have additional safety nets. Regulation: Key to Expansion of Services Governments are often wary of money coming into or going out of a country, resulting in tighter legislation. Africa has a mix of enabling and hampering regulation. In South Africa, tightened regulation and currency exchange restrictions resulted in Western Union moving out of the market (although it must be noted that they have recently reentered the market in 2008, in a partnership with Absa). In other parts of Africa governments have enabled legislation. For example, the Uganda Microfinance Deposit Taking Institutions Act of 2003, enabled MFIs to take deposits – a positive move towards enabling remittances. Other examples can be seen in Mozambique and Lesotho where legislation makes it mandatory for migrants to transfer 60% and 30% of their earnings, respectively.2 However imposing this might seem, a legal framework that supports remittances offers opportunities for MFIs to step in and serve a wider population. Technology as Catalyst Africa is already a leading mobile telephony market, and has seen pioneering projects such as the hugely successful M-Pesa mobile banking solution. Hot on its heels are services such as WIZZIT in South Africa and Celpay in Zambia and the Democratic Republic of Congo – all of which offer mobile-based payments and transfers. Other technology players are also set to play a greater role in the remittances market. A European-based web platform, “My Transfer,” is positioning itself as “the Skype of remittances” – allowing people to transfer money for free, up to a certain amount. The service is already operational, across several corridors, including remittances to West Africa.” By adopting innovative technology, MFIs can not only cut costs and increase efficiency but also increase profits by offering clients additional services, such as money transfers. The examples above, however, are not indicative of the ease of offering remittance services. Fonkoze, the Haitian MFI that has been offering remittances for several years now, only reported profits in 2005.3 Infrastructure in Africa, the developing world is still at a stage where offering regular microfinance services are difficult. MFIs need also think of the additional capacity building that is required to launch such services. It is said that by the middle of this century, a majority of the world’s population will live in urban areas, and with migration growing at 2.9%- the remittances market, cannot be ignored.

Top 5 Remittances Market (for 2007) By % of GDP Liberia (108%, US$ 685 mn) Lesotho (24.2%, US$ 371 mn) The Gambia (12.5%, US$ 64 mn) Guinea-Bissau (9.1%, US$ 29 mn) Togo (8.7%, US$ 193 mn) By volume Morocco (US$ 5.7 bn) Nigeria (US$ 3.3 bn) Tunisia (US$ 1.6 bn) Kenya (US$ 1.3 bn) Sudan (US$ 1.1 bn) Source: World Bank Remittances Data 2008

- By Ranjit Koshi, Associate, Intellecap

1. World Bank, Remittances Data 2008 2. Migrant Labor Remittances in Africa: Reducing Obstacles, African Region Working Paper Series No.64, November 2003 3. Entry of MFIs into the Remittance Market: Opportunities and Challenges, Anne Hastngs, http://www.microcreditsummit.org/papers/Workshops/23_ Hastings.pdf 4. International Organization for Migration, www.iom.int

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“The only limit to your impact is your imagination and commitment.” Anthony Robbins

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? = Better Development Microfinance + _______ A. Water B. Energy C. Health D. Carbon credits E. Education F. All of the above

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Vol. 10, Jan/Feb 2009

Some of the most innovative thinking in the social business sector involves the delivery of environmental, health, and energy solutions through microfinance institutions and their delivery channels. What are the cost issues associated with partnerships when developing diversified product offerings? Which are the most outstanding examples of health and education solutions? Clean water and sanitation tools? Are we asking too much of MFIs? All this PLUS more !

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resources

Recommended Readings Africa Needs Microfinance: Financial Services are Imperative for Progress Eric Thurman, 2008 This paper establishes the potential of microfinance to increase incomes in Africa, a continent with a geographically scattered population and economies based on self-employment. Thurman criticizes the economic assessments done by many researchers, foreign aid officials, NGO workers and corporates, finding fault in the fact that they survey urban centers rather than the economically-deprived, rural conditions where most Africans reside. Although the paper clearly criticizes current poverty alleviation strategies, focusing on providing microfinance services, it ends on an optimistic note. Thurman concludes that despite the low growth of microfinance in Africa, when compared to India, Bangladesh, the Philippines and parts of Latin America, meaningful progress can be made in the years to come.

The Future of Micro-Insurance Regulation in South Africa Department of National Treasury, Republic of South Africa, 2008 This discussion paper highlights the need for a regulatory space for the provision of micro-insurance products within the broader regulation of insurance in South Africa. The authors aim to develop a coherent and clear regulatory framework to encourage the provision and distribution of affordable, good-quality products in line with the government’s objective to increase access to financial services for the poor. The paper proposes the creation of a dedicated micro-insurance license, which could be another potential channel for the provision of market-driven risk mitigation instruments for low-income households.

Microfinance in Africa: Rethinking the Role of the Actors Dr. Ascanio Graziosi, 2007 This paper presents trends in the growth of microfinance in Africa and shows a possible future course of action for its growth. It explains the need for offering diversified services; addressing the varied customer segments and realigning the roles of the major actors to switch from an “outreach-centered” to a “sustainability-centered” approach. Based on the recommendations aimed at enhancing access to financial services, the author streamlines interventions at three levels—macro, meso and micro. Some of the interventions suggested include: the development of a regulatory framework, capacity building and institutional-strengthening mechanisms, guarantee schemes and credit bureaus.

Evaluation of Africap Microfinance Fund (microREPORT #84) M. de Sousa-Shields, 2007 This paper appraises the accomplishments of the AfriCap Microfinance Fund (AfriCap) against its goal of demonstrating commercial

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nov/dec 2008

viability of the microfinance sector in Africa. The author also assesses the impact of equity and the Technical Service Fund (TSF) model on the performance of investee MFIs. The report reveals that AfriCap has proven to be a good high-risk MFI investor in a challenging operating environment. The relationship between investee performance improvements and AfriCap’s participation is a combination of good investment decisions and the sound application of capital, governance, and technical assistance investments. The TSF has helped support AfriCap’s infrastructure and human resource capacity and development, but its impact on supporting microfinance commercialization in Africa is debatable.

Benchmarking African Microfinance 2006 A. Lafourcade, 2007 This report critically assesses the performance, explores trends, and observes the characteristics of microfinance in the Africa. The report reveals that although the African microfinance sector grew in 2006, creating and strengthening formal and semi-formal financial institutions, this growth was rather disparate. There is a split between large, sustainable and efficient institutions, and MFIs that have not yet achieved scale and cost control. The author suggests that to deliver loan and savings services well, MFIs will increasingly have to turn towards technological innovations and strive towards profitability.

Effect of a Structural Intervention for the Prevention of Intimate-partner Violence and HIV in Rural South Africa: A Cluster Randomized Trial Dr. Paul M. Pronyk et al., 2006 This article presents evidence to support the utilization of microfinance services in the prevention of intimate partner violence and HIV, two problems that share a common risk environment in rural South Africa. Intervention with Microfinance for AIDS and Gender Equity (IMAGE) conducted a study in the region to assess the potential of a structural intervention, combining a microfinance program with a gender and HIV training curriculum. The paper concludes that social and economic development interventions, like microfinance, coupled with a training intervention can lead to a reduction in the levels of intimate-partner violence in program participants.

The Regulation of Microfinance Institutions: A Zambian Case Study Chiara Chiumya, 2006 This thesis examines regulatory and supervisory issues in microfinance in order to contribute to the design of a regulatory policy in Zambia. It suggests that at the current stage of development, the development of a regulatory framework for the microfinance sector will have a detrimental effect; the costs of compliance would be considerable and will outweigh any potential benefits that could be gained.

resources

Mark your Calendar November PHILADELPHIA, USA

2008 Net Impact North America Conference* 13th – 15th November, 2008 The event will bring together 1800 graduate students and professionals, to discuss how businesses and organizations can effectively address social and environmental challenges of the 21st century. Sponsor: Net Impact & The Wharton School of the University of Pennsylvania. Website: http://www.netimpact.org/conference

GAUTENG, South Africa

Africa Investment Forum 18th – 19th November, 2008 The Forum provides a platform to bring investors and projects together to enhance African trade and investment, and to build new business partnerships. The focus of this year’s Forum will be on strengthening linkages between African economies as a means to promote new investment. Sponsor: Commonwealth Business Council (CBC) Website: http://www.cbcglobal.org/CBC_Pages/EventDetails. aspx?EventID=33

BUDAPEST, Hungary

Mobile & NFC Payment Strategies* 24th – 27th November, 2008 The event offers an unrivalled opportunity to learn from real-world experiences in a series of in-depth case studies, discussions and workshop sessions led by knowledgeable operators, financial institutions, academics, industry-shaping associations and payment specialists from around the world. Sponsor: IIR Events Website:http://www.iir-events.com/IIR-conf/Telecoms/EventView.a spx?EventID=1040&SearchResult=http%3a%2f%2fwww.iir-events. com%2fIIR-conf%2fSearchEvents.aspx

December DAVAO CITY, Philippines

Financial Analysis for Microfinance Institutions 1st – 3rd December, 2008 This course starts with understanding the basic financial statements and uses prescribed chart of accounts for microfinance institutions and the government. The course uses international, local and best practice financial standards to determine the quality of financial performance. Sponsor: Social Enterprise Development Partnerships Website: http://www.sedpi.com/mod/services-Training.php

HARARE, Zimbabwe

8th Africa Microfinance Network Annual Conference and General Assembly 8th – 11th December, 2008 The annual AFMIN event will bring together microfinance stakeholders to discuss strategies to boost economic growth in Africa with the view to build robust and inclusive rural financing systems that create employment, wealth and increase income of the poor. Sponsor: Africa Microfinance Network Website: http://www.afminetwork.org/events.php?lang=en&goto=e vents&EventSpace=africa&event=16

BEIJING, China

Microfinance Investor Conference* 11th – 12th December, 2008 Microfinance in China is seeing an increasing demand for outside funding, thanks to the rapid expansion and entry of new players into the market. This conference shall bring together Chinese MFIs, international investors, and other stakeholders, and will provide an overview of the Chinese microfinance landscape. Sponsor: Peoples Bank of China and GTZ Website: http://www.gtz-china.org/finance/pbc-gtz-2008/

January CALI, Colombia

International Symposium: Microfinance as a Tool for Peacebuilding 22nd – 24th January, 2009 The main objective of this event is to explore how microfinance can serve as a tool to promote peace and stability for victims of conflict and poverty alike. Learn from microfinance practitioners in El Salvador, Nicaragua, Sudan, Afghanistan and Kosovo. Sponsor: Fundacion Alvaralice, Fundacion Paz Y Bien and others Website: http://microfinance.alvaralice.org/aboutsymposium

NEW YORK, USA

3rd Annual Microfinance East: The Investment Opportunity* 29th – 30th January, 2009 Tailored for both purely commercial and social investors, this conference is designed to help you to recognize the potential of microfinance institutions and microfinance investment vehicles to generate profits while ending poverty. Sponsor: Financial Research Associates Website: http://www.frallc.com/conference.aspx?ccode=B679

* Indicates a Microfinance Insights Recommended Event www.microfinanceinsights.com

nov/dec 2008

microfinance insights

trends

Microfinance Market Indicators

Africa inclusion, and investment in Africa, selected and compiled by the to Equity Ratio Statistics and Debt indicators related to the economy, financial editorial team, with assistance from MIX Market. World Growth in Assetsi 1 Performance Indicators from African MFIs between 2004-07

Debt to Equity Debt toRatio Equity Ratio 3.2

40%

37%

2.7

2.6

Growth in Assetsi

Africa World

47%

36%

2.7

2.5

2.3

3.2 1.8

2.7

2.6

2004

2.7

2004-05

2005-06

2006-07

2.5 2007

2005 2006 Yield on Gross 2.3 Portfolioii

-34%

1.8

Percentage of Women Borrowers

Yield Portfolioii 2006 2004on Gross2005

2007

-57%

Percentage of Women Borrowers 66

24 23

21 57

19 2004 2005 Loan Portfolio 2006 Operating Expense/

2007

Operating Expense/Loan Portfolio

2004

2005 2006 Deposits to Loans Ratioiii

2007

Ratio of Deposits to Loansiii

30 28

23 14

2004

2005

2006

2007

11 2004

2005

2006

2007

Investment Snapshots2 IPO valued at US$55m Tanzaniaâ&#x20AC;&#x2122;s National Microfinance Bank to sell off 21% share of company; restricted to Tanzanian citizens Seed funding of US$25m by Nigerian Intercontinental Bank Plc, AIG Investments and Blue Financial Services to establish Blue International Micro Finance Bank Ltd. Debt capital of US$27m by International Fund for Agricultural Development (IFAD) to help develop microfinance in 12 Nigerian provinces Equity investment of US$28m by international investor, Emerging Capital Partners, for a minority stake in Togoâ&#x20AC;&#x2122;s commercial bank, Financial BC SA, which operates in Benin, Togo, Gabon, Chad and Guinea

microfinance insights

nov/dec 2008

trends

Microfinance Market Indicators Statistics and indicators related to the economy, financial inclusion, and investment in Africa, selected and compiled by the editorial team, with assistance from MIX Market. Financial Inclusioniv

Financial Inclusioniv 3 Kenya (06)

South Africa (06)

Tanzania (07)

Uganda (07)

70 54

Year on year growth of mobile connections

Facts & Figures4

2006-07

2007-08

Africa

58.9%

46.4%

42.7%

Rest of the World

30.5%

43.4%

Sierra Leone

Year on year growth of mobile connections in Q4 2007 was 89%

2005-06

0 Formal (banks)

Formal other (SACCOs)

Informal (ROSCAs)

Annual GDP Changesv

Unbanked

Macroeconomic Indicators5 Increasing Inflation Indexvi

Annual GDP Changesv

Increasing Inflation Indexvi

6.12

235.57 5.96

224.22

5.83 212.58 199.14 5.66

5.55

181.74 5.40 162.65

2007

2008

2009

2010

2011

2012

Annual percentages of constant price GDP are year-on-year Annual percentages of constant price GDP are year-on-year changes; the base year is country-specific. changes; the base year is country-specific. Notes i. Annual percentage change in total assets, which have been adjusted for inflation & standardized provisioning for loan impairment & write-offs. ii. Yield on Gross Portfolio (real: accounts for inflation) = Adjusted Financial Revenue from Loan Portfolio/Adjusted Average Gross Loan Portfolio iii. Deposits to Loans = Voluntary Deposits/Adjusted Gross Loan Portfolio iv. Rotating Savings and Credit Association (ROSCAs) Savings and Credit Co-Operatives (SACCOs) v. Average includes all African countries except: Burundi, Egypt, Libya & Zimbabwe vi. Averages includes all African countries except: Angola, Egypt & Zimbabwe Sources 1. Adapted from: Microfinance Information eXchange. MicroBanking Bulletin. Issue No. 16, Spring 2008. Adapted from: Microfinance Information eXchange. MicroBanking Bulletin and Performance Benchmarks. 2007 Benchmarks, 2008. 2. Adapted from: MicroCapital & Symbiotics SA 3. Munro, Juliet. “Financial Access Matters: A Measure of Zambia.” FinScope, November 2007. 4. GSM World Facts and Figures. http://www.gsmworld.com/news/statistics/index.shtml 5. Adapted from: International Monetary Fund, World Economic Outlook Database, October 2008. 6. Adapted from World Bank staff estimates based on the International Monetary Fund’s Balance of Payments Statistics Yearbook 2008. *Jindal, Megha. Aavishkaar India Microventure Capital Fund. Personal Interview. October 2008.

www.microfinanceinsights.com

2007 2008 2009 2010 2011 2012 Data for inflation are averages for the year, not end-ofperiod Data inflation averages for the year, not end-of-period data.for The indexRemittance isare based onInflows 2000=100. into Africa data. The index is based on 2000=100. in US$ Million

Remittance Inflows into Africa in US$ Million6 28,772 26,611

23,398

20,463 2004

2005

2006

2007

Workers' remittances, compensation of employees, and migrant transfers, credit (US$ million)

nov/dec 2008

microfinance insights

survey

Microfinance In Africa: Growth Rates, Funding, Products and Regulation In each issue of the magazine, Microfinance Insights conducts a survey that relates to our theme, and provides readers with new, unique data points. In this issue’s, survey we asked African MFIs to share their perspectives on a wide range of issues – from the types of products and services they offer, and their growth projections, to their perspectives on regulation. Through these results, we have also tried to understand the gap that prevents MFIs from maximizing their efficiency and scaling up in Africa. The survey drew on complete responses from nearly 100 MFIs in 31 countries across the continent. We learned that 55% of MFIs find financing their operations a problem, and that along with funding, capacity building is also a major problem. Most grants are supplied by large private international funding organizations and not African-based funding organizations. Savings are the second most popular financial service after credit for most MFIs, and most survey respondents said that product diversification plays a role in their strategy for growth. We culled some of the most compelling highlights from our survey on these pages. The complete Microfinance In Africa Survey Report will be sent to subscribers mid-November and will be available online at www.microfinanceinsights.com.

Survey Types of MFIs in the Survey Sample

Sample Overview

Types of MFIs in the Survey Sample 6%

5% 3%

Average no. of Branches

Average no. of Personnel/Staff

334

Average no. of Clients/Borrowers

55,950

Percentage of Women Borrowers

Commercial bank

Average Loan Size (US$)

1,094

Others

Average Repayment Rate (%)

NGO-MFI Microfinance bank NBFI

40%

10%

Cooperative/Credit Union/SACCO

17%

Consultancy

19%

MFI Growth Rates and Funding Types of Grant Funding Agencies that Provide Funding Types of Grant Funding Agencies that Provide African MFIs Funding to African to MFIs

MFI Rates - Actual vs. Targeted MFIGrowth Growth Rates - Actual vs. Targeted Current growth rate

Targeted growth rate in 5 years 25 23

No. of MFI repondents

24 17

Large private international funding organizations

13%

39% 22%

Small private international funding organizations Large, global multilateral or bilateral funding agencies

4 26%

Africa-based funding organizations

0-10% 11-20% 21-30% MFIs with more than 50% of Funding from a Single Source

MFIs with more than 50% of Funding from a Single Source 20%

microfinance insights

nov/dec 2008

Compulsory Savings

Quasi equity

Retained earnings/Internal Accruals

Soft/ Below Market Loans

Debt

Voluntary Savings

Grants

% of MFI respondents

10%

Behind the Numbers US$4,000,000 - Average amount of funding MFIs have received in the last year. To achieve growth targets most MFIs plan to: • increase geographical outreach; • diversify products & services; • improve processes via technology solutions

survey

Microfinance In Africa: Growth Rates, Funding, Products and Regulation Comparison of ProductMFI & Service Offerings Offerings Product

Comparison of Product & Service Offerings 35%

% of MFI respondents

30%

Eastern Africa

Middle Africa

Northern Africa

Southern Africa

Western Africa

25% 20% 15% 10% 5% 0%

Regional Differences: Interest Rates, Regulation, and Deposits Are MFI Interest Rates Liberalized in your Country?

100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

100% 90% 80% 70%

% of MFI respondents

60%

Do MFIs think a Good, Flexible Legal Framework Exists?

80% 75% 70% Yes No 65% 60% 55% 50% 45% 40% 35% 30% 25% Are MFI Interest Rates Liberalized in your Country? 20% Eastern Middle Northern Southern Western Eastern Middle Northern Southern Western Africa Africa Africa Africa Africa Africa Africa Africa Africa Africa Are MFIs Allowed to Mobilize Deposits? 100% Yes No 90% Are MFIs Allowed to Mobilize Deposits? 80% Facts & Figures 70% 60% Most African MFIs (43%) have 25-50% women person50% nel 40% Many African MFIs (38%) say “finding the right staff” is 30% the most difficult HR challenge to overcome 20% 10% 55% of MFI respondents have problems obtaining fi% of MFI respondents

% of MFI respondents

Are MFI Interest Rates Liberalized in your Country?

Do MFIs think a Good, Flexible Legal Framework Exists?

Eastern Africa

50%

Middle Africa

Northern Africa

40%

Southern nancing Westernfor their operations Africa Most Africa African MFIs (42%) operate in rural areas

Most African MFIs find funding and capacity building to be their biggest challenges

30% 20% 10% Eastern Africa

Middle Africa

Northern Africa

www.microfinanceinsights.com

Southern Africa

Western Africa

African MFIs encourage policy makers to: • focus on ensuring that players in the sector operate under clearly defined policies and; • develop separate tax laws for MFIs

nov/dec 2008

microfinance insights

books

Evolution of Informal Economic Clusters in Africa Douglas Zhihua Zeng is a member of the World Bank Institute’s (WBI) Private Sector Development/Investment Climate Capacity Enhancement Program. His book Knowledge, Technology, and Cluster-Based Growth in Africa is a compilation of studies conducted by international and local consultants on “clusters,” groups of enterprises engaged in a similar or related economic activity within a localized geography. Simply written, yet very “insightful” case studies make for a fascinating journey to these groups, that overcome many constraints like non-availability of capital, skills, technology, lack of market access, etc., and evolve. Ordering Information Knowledge, Technology, and Cluster-Based Growth in Africa Edited by: Douglas Zhihua Zeng Published by: The World Bank, 2008 144 pages ISBN: 9780821373064 Price: US$20.00

In Kenya, the informal economy, known in Swahili as Jua Kali, accounts for 18% of the country’s GDP. Jua Kali workers create metal or wood products, handle vehicle repair or manufacture garments; whatever their sector, their commonality is their location in low infrastructure areas. The Kumukunji group of metal workers is part of the Jua kali economy, and is one of the oldest “clusters” in Nairobi. The group arose in a natural, if somewhat disorganized, way after a several groups of metal workers were resettled together. Excluded from the formal economy, the cluster has adopted growth strategies and developed social linkages to survive. This cluster is one of the dynamic groups analyzed in a new book on the success, sustainability and challenges faced by informal economic clusters. Knowledge, Technology and Cluster-based Growth in Africa documents the economic activities of eleven such enterprise clusters. The book presents findings conducted by the World Bank Institute in seven low and middle income countries in Africa, with a focus on knowledge, technology and the policy environment within cluster based enterprises. Each cluster represents a cross-section of geographic and sectoral businesses, ranging from natural resource-based functions like fishing, cut flowers and wine production to technology-focused groups that produce computers and automated parts. Most of the clusters studied have evolved as voluntary aggregations of enterprises. Networks, foreign technology, academic

microfinance insights

linkages, skills sets, government support and cooperative action impact the clusters to varying degrees, based on their activity and location. For example, in the Otigba computer cluster in Nigeria, the computer hardware is obtained from China, Malaysia and Dubai; as a result and technical and production channels have been established in these countries. Through reverse engineering, local technicians have now acquired the process technology required for computer assembly. The Kenyan cut flower cluster got a boost when the government recognized the importance of horticulture in 1966 and created the Horticultural Crops Development Authority (HCDA). These, and many more features, operating at different scales within a cluster make it distinctive and economically viable.

“With the exception of only a few clusters, most confine their operations to Africa, and their failure to meet international standards makes them domestic slaves.” The authors argue that these clusters are imperative to the African economy, but there are many impediments to their development. Lack of access to adequate capital and technology are the biggest challenges in diversifying their operations and expanding their reach. With the exception of only a few clusters, most confine their operations to Africa, and their failure to meet international standards makes them “do-

nov/dec 2008

mestic slaves.” The involvement of universities and educational institutes in contributing to the overall growth of these clusters is minimal, as is the case with government and institutional support, barring a few exceptions. The authors emphasize that for these clusters to sustain themselves and to compete in the international market, networks within and between them should be encouraged, especially with foreign companies. There is an increasing need for these clusters to focus on skill development, technological and product innovations and research and development activities, in collaboration with universities and technology institutes. The role of the government has to be facilitating, enabling and encouraging and the institutional mechanism should ensure that basic infrastructure has been appropriately provided to these enterprises. Overall, the book is an invaluable resource for students, policy makers, economists, and microfinance enthusiasts. Each case study is a fascinating journey through the creation and maturation of each cluster. The language is simple to understand and the case studies provide unique insight into some of the most prevalent livelihood activities of Africans and their increasing role in bringing the continent out of economic turmoil. n - By Vibha Mehta, Associate, Intellecap

books

Market-led Microfinance: What’s in it for me?

Book Excerpt: “Conversations with Practitioners: The Challenges of Market-led Microfinance” Guy Winship is a microfinance specialist, Director of World Education Australia, and Regional Microfinance Advisor for the Asia and Special Programs Division of World Education, Inc. In this book, he explains why and how microfinance institutions can and should become market-led institutions. The format of the book is unique, in that it presents sound bites and excerpts of interviews in response to specific questions and thematic areas. The respondents are MFI CEOs and leading microfinance experts from Africa, as well as prominent thinkers and writers on commercial microfinance internationally. The excerpt below presents the views of several interviewees on market-led microfinance. Ordering Information Conversations with Practitioners: The Challenges of Market-Led Microfinance By: Guy Winship Published by: Practical Action Publishing 128 pages ISBN: 978-185339-623-6 Price: US$29.95, £13.46 (Paperback)

hat does market-led microfinance mean to you and what are the advantages and disadvantages of being market-led for your institution? Charles Nayali, CEO and Co-founder, Uganda Microfinance Union: For me, market-led usually means two related things, being the leader among your competitors and giving your clients what they want. It means listening to the people who already get your services as well as to those who might want them, and providing them the products and services they want. Then you must go back to them, again and again, you might find that they actually need better customer service rather than new products. Then you try to feed the information back into the system and improve. So you are led by what others want and never rest or believe that what you offer is enough. What happens when client’s desires conflict with institutional needs? James Mwangi, Director, Finance and Operations1, Equity Building Society, Kenya: When we talk about having a market-led focus at Equity, our understanding is that first the needs of the customers are identified, and those become the product and services that the company will provide and therefore dictate the delivery channels that the company will adopt.....Unless you are creative enough, there is a conflict between what the organization wants and what the cus-

tomer wants. If the conflict is great, you may be tempted to do nothing. But the trick is to be able to leap over the conflict between the organization’s needs (the investors, the employees and the management) and those of the customers. One of the ways we have managed to resolve this is by being creative in generating the solution. For instance, at Equity, we changed from calculating interest on a declining balance to a flat rate on a monthly basis. Although the interest rate remains almost the same, the customers were more satisfied. We found that the clients don’t always know what the service is costing them— they want prices that they are able to understand and are able to compute themselves. Market-led microfinance clearly implies multiple practices that are new to many MFIs— market research, establishing processes through which client input and feedback are fed back into the products and services offered, monitoring client satisfaction, etc.... Paul Segawa, Operations Manager, FINCA, Uganda: ...products appropriate to the needs of the clients will already have a market making them easy to sell. The challenge surfaces when meeting a need in the manner that the market seeks is too expensive for the company, resulting in a price that may not be affordable for the client. Management is critical, but no single factor is key to getting the institution to become market-led. A dedicated staff and the Board,

low drop-out rates, and knowledge of customer needs are all key. I also think that staff and client incentives can play a role in developing a marketled orientation in an institution as they can orient behaviors in a coordinated manner. Management must not only lead to the orientation towards a market-led approach, but must also explicitly define these values both in writing and through action, ensuring that the necessary resources, systems and intra-organizational coordination are in place to move the entire institution in the direction of clients, in a cohesive manner. What are the implications of not being market-led? David Cracknell, Program Director, Africa, MicroSave: Everyone knows—or should know—that that from an institutional perspective you ignore your customers at your peril. We’ve already seen that customers at Tanzania postal bank and Kenya postal bank use unfriendly postal accounts very infrequently. But if you provide a service that is quicker, faster, easier and more flexible, people will use it appreciably more, and the transaction balance will be higher…sustainability is generally a big part of what donors are paying for these days, so how do you become sustainable? You certainly become more profitable in the long run by pursuing a market-led agenda. n

1. James Mwangi is now the CEO of Equity Bank (formerly known as the Equity Building Society).

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nov/dec 2008

microfinance insights

last word

The World’s Other Economic Crisis The global credit crunch should not sway our attention from the ongoing economic crises in some countries in Africa. A bailout, in the form of microfinance services, is urgently needed, argues Eric Thurman, former CEO of Opportunity International.

he stock market meltdown that began in the United States and then spread to Europe and other wealthy countries is teaching us a lot about financial disaster. It proved that extreme economic troubles call for swift and strong responses. As banks and other investment firms failed, both governments and the private sector swooped in with massive recovery programs. The crisis was taken seriously because so many people in so many countries faced personal financial catastrophe. If this financial crisis merits a powerful response, Africa deserves strong medicine for its economic ills, even more so. This is reinforced by new data from the World Bank released shortly before the stock market crash. The researchers called their new statistics a “major overhaul to the World Bank’s past estimates of global poverty, incorporating new and better data.” The numbers reveal economic disaster that, like sub-prime lending in the West, will result in great peril for millions of people if ignored. One particularly important finding shows how much worse poverty is in Africa compared with the rest of the world. The revised data1 shows progress in all regions of the world, except Africa. In Asia, the percentage of people living on US$1.25 per day or less dropped significantly during the period. Africa was the only area, worldwide, where the percentage of poor people did not decline. For 25 years that percentage has been stuck with 50% of the continent’s population trapped in severe poverty. Not only did the percentage for Africa fail to improve, even worse, the number of people unable to achieve a decent standard of living soared. The total number of Africans locked in poverty nearly doubled – from 200 million to 380 million – between 1981 and 2005, the cutoff date of the revised information. Further, the depth of that poverty was worse than previously realized. The average person in this group struggled to survive on just 70 cents per day. This prompted the new Chief Economist for the World Bank, Justin Lin, to conclude, “…we must redouble our efforts, especially in sub-Saharan Africa.” For those of us who care about Africans and believe

The author with Batwa (pygmies) in Burundi.

in their innate resourcefulness, this situation is unacceptable.

“Not only did the percentage [of poor people in] Africa fail to improve, even worse, the number of people unable to achieve a decent standard of living soared.” There is a solution, perhaps not for the total economic development of all 48 sub-Saharan nations, but a remedy that will drastically reduce the number of Africans mired in deep poverty. The cure is microfinance. Though the cure is proven, it is woefully underutilized. Financial services, whether micro or otherwise, remain unavailable for most Africans. New programs must be launched, existing ones expanded, and regulations favorable to microfinance adopted. The lack of even rudimentary financial services is a big factor that keeps so many Africans

Eric Thurman supervised microfinance programs in 30 countries while CEO of Opportunity International, and later, HOPE International. He was CEO of Geneva Global when it researched and funded human development programs of many types in more than 100 countries. Today, Thurman is a consultant to NGOs, donors, and churches that support programs in poor communities globally. He co-authored A Billion Bootstraps with Phil Smith, a successful businessman and client. The book is a popular introduction to the microfinance movement.

1. Available at http://www.bicusa.org/en/Article.3887.aspx

microfinance insights

impoverished. Most rely on self-employment, such as farming, vending, or some other smallbusiness activity. They have no place to turn when they need even a small amount of working capital—as little as US$100—to grow their tiny enterprises and increase their incomes. In their entire lifetimes, most have never interacted with a financial institution. About five years ago, I helped establish the first legally registered microcredit NGO in the Democratic Republic of Congo (DRC). At that time, only one in 1,000 DRC citizens had a bank account. While Congo has faced a dreadful array of difficulties including conflict, AIDS, and natural disaster, the near total lack of financial services kept people from progressing even when they could. In the United States, if only one in 1,000 people had access to banking services, half of the U.S. population would be desperately poor, too! Whether in the most developed or least developed countries, people must have reliable ways to borrow, save, and invest money. Unfortunately, those services are often missing in Africa. One study found that 65% of Africans had no access to financial services. Africans urgently need an upsurge in microfinance services so they can work their way out of relentless poverty. The whole world is struggling with economic troubles but, arguably, Africa is in the worst predicament. What this immense continent needs directly parallels the emergency financial measures recently adopted for the world’s largest economies. Africa needs reliable financial services, widely available for the common people. Unless that occurs, when the World Bank updates its statistics again, Africa will continue to be the sole region of the world where poverty gets worse. n

nov/dec 2008

London, UK Uniglobal Research Banking and Finance for Women to Drive Profit & Growth September 18th-19th

London, UK C5

Helsinki, Finland Helsinki School of Economics

Global Summit on Microfinance Investments October 29th-30th

Sustainable Innovations at the Base of the Pyramid September 26th-27th

New Delhi, India PlaNet Finance Microfinance and New Technologies Summit October 21st-22nd

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If you just started reading Microfinance Insights, here’s what you’ve missed…. Volume 8 - Technology Solutions: Testing the Waters

New Delhi, India Micro Insurance Academy

Think mobile phones, think smart cards, think biometric devices, think microfinance. This issue delves into technology solutions for Microfinance. Technology will not only make the lives of people at the base of the pyramid simpler, it could also be the great socio-economic leveller. The first bimonthly issue includes an exclusive interview with Prof. C.K. Prahalad, author of Fortune at the Bottom of the Pyramid, highlights from our Technology Survey, and perspectives from Intel, IBM, Microsoft, and PlaNet Finance.

2nd Annual Reinsurance School October 15th-17th

Features TM

Vol. 7, July 2008

Cover Price: US$15/Euro 11

Interview Jean-Philippe de Schrevel BlueOrchard Survey Investment Perspectives from MFIs & Investors Commentary Commercialization of Microfinance: Barbarians at the Gate? Mitigating Risk Subprime Crisis and Microfinance

San Francisco, USA Xigi Media

Indian Microinsurance: What Works? September 19th

Chennai, India Sa-Dhan

MAINSTREAMING

A publication by Intellecap

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This volume draws from global perspectives to highlight ways to solve issues related to recruitment practices, staff training and incentive systems. Inside you’ll find a provocative commentary on the Forbes Top 50 MFIs List and international voices from Pakistan to Bolivia and Tanzania to Tunisia.

Volume 5 - Focus on Microinsurance

From planning dynamic roundtables and events to promoting your event through our networks, Microfinance Insights adds value to every partner we work with. In the last two months, Microfinance Insights has participated in eight financial inclusion conferences and events around the world, including our own event “Indian Microinsurance: What Works?” in September.

A strong drive to understand microinsurance stems from the realization that insurance is an essential tool to provide protection against financial losses due to illness, economic activity, environmental and political issues. This issue provides insight into the growth potential for microinsurance and reveals how it can mitigate risks for the poor.

Volume 4 - Innovations in Financial Service Delivery Mechanisms Globally, the microfinance sector is standing at a juncture where innovative mechanisms to take financial services delivery to the last mile, are emerging regularly. The issue reveals the tip of the “innovations” iceberg and highlights examples of mechanisms that have made a difference and challenged established norms.

If you are planning a financial inclusion, responsible finance, CSR, mobile money or microfinance event, training or workshop, partnering with Microfinance Insights gives you access to readers on 6 continents, our diverse database, and exposure through our new website, visited by 1500 people in just the first two weeks after launch. To find out more about how you can partner with us, email team@mfinsights.com. &

There are numerous signs of the sector’s move into the mainstream: MFIs are shedding their NGO skins to become regulated entities; commercial banks are scaling down to reach a segment once thought “unbankable,” and mainstream investors are pushing money at the sector. All the while, traditionalists shout, “What about mission?” The July 2008 issue focuses on this move from niche to mainsteam.

Volume 6 - Focus on Human Resources

STANCAP 2008 September 25th

Globetrotting

Are We Ready for Takeoﬀ?

Mumbai, India Intellecap and Microfinance Insights

Social Capital Markets (SoCap 2008) October 13th-15th

Volume 7 - Mainstreaming: Are We Ready for Takeoff?

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