In the whirl of new job, travelling, and adventures this year I’d forgotten all about this blog! Only to be reminded by none other than Hugh Sinclair when he emailed me last week and thanked me for my book review. So in an attempt to catch up on nine months of experiences of microfinance around the world I’ll be posting some blogs over the next few days…!
1) March 2013: AFRICA
Despite this title, I actually hate it when people label something ‘Africa’ given the complexities of each country throughout the continent. I took a trip back in March to Ghana, Nigeria, and South Africa to look at some of the microfinance initiatives and institutions in these countries. Despite what many people associate with Africa – corruption, disease, famine – there is such good and it’s a continent on a turnaround with many great microfinance initiatives, success stories, and opportunities for investment. There’s actually an inspiring Ted talk by Euvin Naidoo about investing in Africa, which is well worth a view:
However due to the inherent country risks and nascent form of the microfinance sector (with often limited or no regulation) in Africa, there has been a lack of funding from investors to date compared to Asia and Latin America. This has severely hampered growth as timely funds required to finance MFI loans and to strengthen the infrastructure have not been made available. Funding through the government and donors, which are currently the primary sources, often come with conditions attached or are subsidized – leading to market imperfections. Or worse, and often illegally, funding is mobilized from client deposits.
Ghana, with its long history of informal savings and credit, has one of the more mature microfinance markets in Africa (with Kenya, Tanzania, and Uganda arguably being the most developed). There are over 80 institutions listed on MIX with a gross loan portfolio of $0.3bn. However according to the World Bank over 70% of people still do not have access to formal financial services and there remains a huge potential demand for microfinance. At present, Ghana is home to 24 million people and 100 different ethnic groups, with 79% living on below $2 a day.
The microfinance sector has been relatively slow to take hold in West Africa in comparison with East Africa, Latin America or Asia, however is rapidly catching up. The combination of recently found political stability, market capacity, entrance of international microfinance networks and innovation in products and services has started to attract the interest of commercial investors and grow the market.
The government has played an instrumental role in reforming policy framework, and the Operating Rules and Guidelines for MFIs issued in July 2011 by the Bank of Ghana laid out the regulatory framework for MFI tiers. Tier 1 being Rural and Community Banks, Finance Houses and Savings and Loans Companies (regulated under the Banking Act), Tier 2 being susu companies, credit unions and deposit taking NGOs, and Tier 3-4 being the more informal money lenders, susu collectors and non deposit taking NGOs. Therefore while formal financial institutions have a strong regulatory framework, it is less developed for the microfinance sub-sector. Additionally, these do not incorporate specific provisions for consumer protection and responsible finance, however the Bank of Ghana also houses the Investigation and Consumer Protection Office in this role both in terms promoting consumer protection and educating clients on their rights and responsibilities.
I visited a couple of microfinance institutions whilst in the country, both of which were performing well, were profitable and had effective consumer protection mechanisms in place. One of the borrowers I spoke to was on his third loan cycle and had used it to build and expand his vehicle parts business (below) which was now able to successfully support him and his family and enable his children to go to a good school. The only issue I had was that interest rates were high compared to MFIs I’d visited in other countries. There are no caps on lending rates and typically these vary between 40-60% APR in the sector depending on the formality of the institution, and can be over 400% in some cases (see MFTransparency).
Overall I feel the Ghanaian microfinance sector has shown strong signs of growth over the past few years, although a lot remains to be accomplished in terms of financial sustainability and outreach as well as improved regulation and guidelines for the less formal institutions. As the market matures, an emphasis on social returns and value-add services (such as financial literacy to clients), and a more holistic product approach (e.g. micro-pensions, micro-insurance and micro-housing) should hopefully develop.
Nigeria is Africa’s most populous country, with 169m people. However 85% of these live below $2 a day and over 70% of people do not have access to formal financial services according to the World Bank. Compared to many other countries in Sub-Saharan Africa, Nigeria’s financial services sector is more developed and diversified, offering a good variety of products and services for corporate and high net worth clients. However even though Nigeria was one of the pioneer countries in microfinance in the early nineties, the sector is still nascent with few operators of significant scale. Similar to many countries in Africa, this slow development has mainly been due to a lack of funding, capacity building and technical skill.
The Central Bank of Nigeria launched a regulatory framework in 2005, which included the transformation of all community banks into microfinance banks (MFBs). The number has now ballooned to over 900 institutions registered as MFBs. However reporting from clients indicates that many customers are uncertain and suspicious of these banks, and the sheer number of institutions has created a regulatory burden. Furthermore, a number of them lack the structure, capacity and capability to do the business for which they were licensed. The regulator examined the MFBs across the country in 2010, out of which 27% per cent were found to be ‘terminally distressed’ or ‘technically insolvent’. Some of the problems identified include lack of good corporate governance, unhealthy risk management strategy, and weak internal control systems, leading to the withdrawal of licenses of over 200 operators. In June, 2011 the CBN released a new set of guidelines for microfinance banks operating in the country whereby MFBs would operate under three categories, which include unit, state and national microfinance banks – with required paid up capital ranging from N20m to N2billion.
Although the regulator appears to be taking an active role in the sector, criticisms have continued to trail the operation of the MFBs, many of which are accused of failing to grow the lower level of the economy and benefit the poorest. Despite there being over 900 MFBs there is a lack of understanding of the concept and methodology of delivery of microfinance by the operators. There is a high concentration of MfBs in the major cities and urban areas (predominately in Lagos) rather than the rural areas where they are really needed, with associated high running costs. On MIX market the gross loan portfolio stands at $1.3bn across 1.8m borrowers with a number of large MFBs contributing to this amount e.g. LAPO, Babura MFB, and Fortis. This suggests an average loan size of almost $1000 (compared to an average of around $100 in Asia). The CBN guidelines were updated earlier this year to further improve operations, including promoting the establishment of more MFBs to reduce poverty at a grassroots level and encourage financial inclusion.
Mohammed Yunus himself has spoken out about the Nigerian microfinance sector – saying that it is not microfinance banking but rather micro commercial banks – aimed at traders, suppliers and importers rather than the poor, in urban areas. In contrast to his Grameen model, the consumer provides collateral, loans are typically used for expansion of business rather than starting new businesses and, most tellingly, are provided to men (see a review of his speech here).
I’d had some apprehension before travelling to Nigeria. The gov.uk website was advising against all but essential travel, and against all travel in the North East where there was ongoing unrest and subsequent military operations. Friends had also reminded me about recent terrorist kidnappings (a month before seven foreigners were kidnapped and killed by militants in Bauchi state in the North), however I figured I’d be fine being based in Victoria Island, an affluent town in Lagos situated in the South West of Nigeria. And when I arrived, I was pleasantly surprised – the streets were clean, people were friendly and I felt perfectly safe walking around – although the traffic was something else and took soooo long getting anywhere by car!
I again met with a couple of microfinance institutions whilst I was in Lagos. They were performing well operationally but two issues came to light. Both expressed a desire to get a National licence however under capitalisation and the lack of funding was a problem – a jump from N100m ($0.6m) for a state-wide licence to N2bn ($12m) for a National licence. I also noticed that interest rates are high (there are no regulatory cap or margins) at around 50-60% APR. There has been recent criticism of Nigerian MFIs charging interest rates of well over 100% when other costs such as fees and compulsory savings are taken into account. As an example, the 2011 Planet Rating report listed 144% as the highest APR that LAPO charges, taking into account mandatory savings by the third year (originally calculated by MFTransparency and also critiqued by Hugh Sinclair in his book). Note this has apparently decreased since, although I have not seen any data to prove this.
I also got the opportunity to meet with the founders of Pagatech, who launched Paga in 2011, a direct to consumer mobile banking service. Like many of the entrepreneurs in Nigeria, Pagatech was founded by two young Nigerians who studied and worked in the USA in Silicon Valley before returning home to help build the Nigerian economy and I found them very enthusiastic and impressive! Paga is an innovative, open, secure, and interoperable mobile payments platform that allows any person who has a mobile phone to transact electronically – turning the phone into an electronic wallet to send cash, save, remit funds, purchase airtime credit, and pay bills via a network of retail agents. Through this ‘branchless banking’ model it provides financial services with a focus on the underserved segments of society. Like many developing countries, although 80% of Nigerians do not have a bank account, an estimated 38% (60m) have mobile phones. There is therefore a huge potential for mobile banking. Pagatech’s number of clients and its agent network have shown substantial growth, with 190,000 users and over 800 agents by August 2012. Its goal is to have 30,000 agents across Nigeria in five years and 15 million customers.
Travelling to South Africa, I was somewhat dubious about whether microfinance was a need here, especially in Cape Town where I would be staying. Spending the first evening in the Victoria and Alfred Waterfront with the dramatic backdrop of Table Mountain behind me, the expensive restaurants, impressive yachts, and gleaming shopping malls seemed to reconfirm this. Let alone a stroll the next day along Camps Bay – with sophisticated South Africans relaxing in the many bars and cafés along the beachfront. Who here would need microcredit?!
Of course this initial impression is a far cry from the South African market as a whole. With a population of 49 million people, according to the World Bank, almost 46% of people do not have access to formal financial services and over 50% live below the poverty line. Three quarters of this group lack access to electricity and running water. The rural poor live in villages that are crowded between commercial farmland and game reserves, or in the sprawling townships on the outskirts of the cities.
There are just 18 MFIs listed on Mix Market, which are mainly NGOs and non-profits. More telling, the list includes Capitec Bank – a retail bank listed on the Johannesberg Stock Exchange and is one of the most prolific formal microcredit providers in South Africa. A number of the other large banks have also jumped on the microloan bandwagon as a way to make high profits by lending out expensive funds to the very poorest. In a country where trust and confidence in financial institutions is poor, the largest and most established banks dominate the market.
South Africa has a long history of informal credit, from the mashonisas (local moneylenders) to rotating savings and credit associations (ROSCAs). However with the growth of more sophisticated microfinance institutions and banks taking over the market, with easy access to pay-day loans and other forms of credit, there is a worrying potential for over-indebtedness. Nearly half of the 19 million credit active consumers in South Africa are described as having ‘impaired’ credit records, while a further 15% are described as ‘debt-stressed’ (one or two months in arrears). This translates to more than 11 million (more than 60%) of all credit active consumers in South Africa now being defined as over-indebted (see a commentary on this topic here).
So what about regulation? To counter these pitfalls of microfinance and protect consumers, the National Credit Act (NCA) was launched in June 2006, which covers loans and other credit from banks, including micro-loans. The National Credit Regulator (NCR) was also formed under this act for the regulation and promotion of an accessible credit market, with a focus on historically disadvantaged, low income and/or rural communities. It also promotes pricing transparency for MFIs though the publication of effective interest rates. However, although the Act limits interest rates to 60%, it still allows lenders to still charge huge prices through the application of fees, in some cases up to 400% APR. There is a credit bureau in place to monitor credit history, although no limit on the number of loans that can be taken (such as the case in India).
Housing finance is also a growing sector in South Africa. One of the institutions I visited on my trip was Kusyasa Fund, a social development organization that uses microfinance as a tool for improving the housing conditions of South Africa’s poor communities. The fund caters for pensioners, those who earn under R3 500 a month or are informally employed. These people are then eligible for loans of up to R10 000 (c.$1000) for use in improving their homes. Clients are encouraged to use the funds for renewable energy products such as solar water heaters, stoves, and lamps along with general renovations: tiling, tubing, electricfication, plastering, painting, fencing, flooring, and structural extensions.
The Kuyasa Fund was initially established by a Cape Town-based community development NGO, which saw a need for additional financing for South Africans who qualified for the state housing subsidy. The Fund now works in townships across Cape Town, all characterised by informal housing, low and erratic incomes, and a high percentage of female-headed households. I went out into one township for the day to see the local offices (innovatively made from used shipping containers) and met with a number of the borrowers who welcomed me into their homes and delighted in telling me about the improvements they had made with their loans. One elderly woman had expanded her house to create a small grocery shop in the front of her house, one had improved her house and started a sewing business in the back to support her sister’s children (who had sadly died and she had taken them in), whilst another man had used the loan to build a bathroom and improve sanitation for his family. The latter made me laugh so much – when I asked if he would take further loans he told me “oh yes, one day my house will be THIS big (arms outstretched)… I will get a new gate around the house for security, an extension… and one day a yacht…!!!”. The loans were obviously having a big impact on the overall well-being of the people in the townships and I was pleased to see the difference they could make.
Seeing the townships first hand and walking around, talking to the local people, really opened my eyes to the other side of Cape Town. The dual economy of extreme inequality resulting from the apartheid era still remains a huge issue. In India the slums are right next to (sometimes inbetween!) the high-rise blocks and wealthy areas so can’t be ignored, but here the townships are further out and I felt as if most tourists would probably be oblivious to such poverty.
Overall I learnt a lot on this trip about the microfinance sector in Ghana, Nigeria, and South Africa and saw what was working well in these countries and where the gaps still lay. The difference across Africa in terms of regulation, and also the role of the regulator varies enormously. There is great potential for the market but also key issues to be resolved in terms of lack of funding, capacity building, mission drift, and employing local people with the right skill sets.
However what struck me most from talking to people across these three countries was the lack of access to basic services such as infrastructure, transport, healthcare, education, and sanitation – which not only affects the poorest but also the majority of the population. Poverty is not due to a lack of income alone and until there is still a lot of work to be done in building these structural social and welfare blocks before microfinance can truly be effective.