Global dynamics shaping the micro-finance sector
“Our research shows that microfinance always existed in Africa, albeit informally. Revolving credit associations were the first form of microfinance; credit unions rapidly expanded; and today the panorama is quite diverse, with individual lenders, self-managed groups, cooperatives, NGOs, regulated MFIs, and even banks, providing a wide range of financial services.”
Mark & Associates Consulting Group
Micro-finance
GLOBALLY, we have witnessed how impact-investing and micro-financing has captured the world’s attention. In fact, microfinance has emerged from the periphery of finance, offering hope for financial inclusion and poverty alleviation in most emerging nations. Beginning in the 1970s, a microfinance revolution swept through Asia and Latin America, helping countless millions of poor people get the economic boost they needed to start small businesses and work their way out of poverty.
It should also be noted that the 20th century witnessed an acceleration of the globalisation of the world economy. This unique development was triggered by (i) increasing population growth rates, particularly in emerging markets, (ii) widespread economic growth and development, (iii) relative political stability among leading nations, (iv) significant technology transfer and technical assistance to less developed nations, and (v) a proliferation of international trade treaties and agreements. As a result, the once peripheral nations (today referred to as emerging and frontier economies) are becoming much more central to the global economy.
Impact investing
This globalisation has also spurred free capital mobility and this has enabled global impact investors to drive the growth of microfinance in emerging nations. The miracle of microfinance is also evident in the extraordinary efficiency of the transactions: very small investments yield large benefits in terms of family income and well-being. Typical microfinance loans can be as small as US$50 or even less — which is one reason why banks have not been interested in microfinance.
Such small amounts are simply not profitable for banksKL;KO; — yet these tiny sums can have an amazing impact on people’s lives. Symbiotics, an investment company dedicated to inclusive and sustainable finance in emerging and frontier markets defines impact investing as an extension of the effort of microfinance investors to redirect capital from saturated markets, where supply exceeds demand, into underserved markets, where demand far exceeds supply. The primary target of impact investing remains the base of the pyramid in faster growing economies, both low and medium-income households and micro, small and medium businesses.
Mark & Associates Consulting Group notes that by targeting underserved markets like these, investors can ensure more rational and sustainable value creation in their asset allocation, with a promise to achieve less volatility and more stable returns in the long term. However, most potential impact investing target markets like Sub Saharan Africa are still unaccustomed to such capital flows as they are largely informal and unregulated, with constituents who are more vulnerable in nature and have little financial security.
Beyond the concept of impact investing, therefore, rests the intent to offer support by providing technical assistance towards better regulation and supervision of this development.
A common feature is that investors interested in small enterprise impact investing, especially those based outside target countries, typically do not invest directly in small enterprises. They usually structure their investments through foreign investment funds that target a diversity of emerging and frontier markets, balancing and diversifying country risk.
These funds in turn will usually not invest directly in SMEs but target local intermediaries, with local staff, knowledge and resources. These local financial intermediaries represent the core focus of the investment for such investors. These specialised intermediaries will use investor capital to finance small enterprises in their domestic markets, through debt or equity, with the aim of bridging the “missing middle” and fostering positive social transformation.
Impact investors will have a selection bias towards financial intermediaries that predominantly focus on financing businesses, which provide populations at the base of the pyramid with jobs and with goods and services of first necessity, such as access to food, homes and energy
Increased focus on women
An important phenomenon is that microfinance has traditionally focused on women. According to CARE, a leader in international development, since microfinance began in the early 1970s, approximately 70% of the clients of microfinance institutions (MFIs) have been women. The reason for this is deliberate and strategic. It was soon recognised that women are the best conduit for ensuring that microfinance confers the greatest possible benefit on the greatest number of people. Throughout the world, women are responsible for the well-being of their families.
Most girls are obliged to start performing household chores at an early age — sometimes as soon as they can walk — and this develops a work ethic and a sense of responsibility as nurturers, caregivers and educators of their young siblings. Moreover, poor women who have access to financial services have proven themselves to be highly creditworthy. Anecdotal evidence indicates that women repay their loans more consistently than do men. As a result, investing in the earning power of women pays big dividends for families, for society and for microfinance institutions, enabling them to serve more clients. Thanks to microfinance, married women often gain greater control over household assets, a more equal share in family decision-making, and greater freedom to engage in and control income-generating activities. Overall, microfinance is viewed not only as a poverty alleviation tool but also as an effective way to empower women across both emerging and frontier markets.
Micro-finance in Africa
While the industry has been developing in Africa, the microfinance evolution of the 1970s that took place in Asia and Latin America somehow bypassed Africa. This has been a major cause of concern given that an overwhelming majority of the economically active population, above all in rural areas, so far remains excluded from the formal financial system; and even those who have access to the financial system can still not get all the services they need.
Despite healthy economic prospects, the region has the lowest share of banked households in the world (12%) and the highest share of poor people, with 50% of the population living on US$1,25 a day or less (CGAP and World Bank).
Without access to basic financial services, Africans are at risk of remaining at the margins of economic opportunity with little hope of realising their tremendous creative potential. In the past, most poor Africans relied on homegrown, often unreliable and exploitative traditional services in the form of deposit collectors and moneylenders. Now, microfinance institutions that offer more diverse and sophisticated financial services to the poor are reaching more people.
A look at history shows that microfinance always existed in Africa, albeit informally. Revolving credit associations were the first form of microfinance; credit unions rapidly expanded; and today the panorama is quite diverse, with individual lenders, self-managed groups, cooperatives, NGOs, regulated MFIs, and even banks, providing a wide range of financial services.
Generally, microfinance in Africa has developed in different stages across the region. Financial intermediaries such as cooperatives, rural and postal savings banks pioneered the industry in the 1970s, especially in West and East Africa.
In the 1980s and 1990s, the sector saw several donor-supported credit-only nongovernmental organisations (NGOs) develop and sometimes transform into new types of non-bank financial institutions by the end of the 90s. Today, West Africa is dominated by credit cooperatives, while regulated non-bank financial institutions stand out in East Africa, and Southern Africa is mainly served by NGOs, some downscaled banks and newly established special-purpose SME banks.
New or Greenfield MFIs began appearing in the mid-1990s. The number of Greenfield institutions has increased rapidly in Sub Saharan Africa over the past three years, due to many reasons, including the scarcity of strong local providers that serve the low-income market.
Local funding, such as deposits, plays a dominant role in the funding structure of MFIs. In addition, local government funding sources are available in many countries in the region. Government programmes often operate as funds (for example The National Fund for Microfinance in Benin) or are registered as companies with majority government ownership.
In some countries (for example in Rwanda), the government is an important player in the ownership structures and boards of financial institutions. Sub Saharan Africa has many financial service providers, including credit unions, non-bank financial institutions (NBFIs), banks, savings banks, savings groups, postal savings banks, and mobile network.
This is excerpt from a research report on the Micro-Finance Sector compiled by Mark & Associate Consulting Group. The Zimbabwe Independent, in partnership with Mark & Associate Consulting Group, will be publishing detailed industry-specific research reports monthly. The reports provide insights to policy-makers, business leaders and investors. To read the full report, go to https://www.theindependent.co.zw.