Rising portfolio risk in Sub Saharan African Microfinance Sector : Report


Microfinance Focus, May 13, 2011: According to the recently released Sub Saharan Africa (SSA) Microfinance Analysis and Benchmarking Report 2010 form Microfinance Information Exchange (MIX) and Consultative Group to Assist the Poor (CGAP), portfolio-at-risk continues to increase for the third consecutive year in the region.

The report claims that SSA continued to have the highest risk of all regions globally and is the only region with PAR greater than 30 days over 5 percent. SSA also has a lower risk coverage levels than all other regions, with provisioning not adequately covering current delinquent portfolios.

Many financial service providers have poor reporting and control systems, increasing the likelihood that the PAR numbers cited are actually underestimated. The report further shows that though 26 countries in SSA have public credit registries and 13 have private credit bureaus, microfinance providers participate in only six countries: Burundi, Mozambique, Rwanda, South Africa, Tanzania, and Uganda.

The report highlights the growing commercialization in the SSA region with 57 percent of new institutions, the majority of which are NBFIs, are for-profit, compared to 43 percent for young and mature financial service providers.

According to the report’s findings, a significant number of Greenfield microfinance institutions have been created in the region during 2007-2009 by holding companies like ProCredit, Advans, Access, and MicroCred, and international networks, such as Opportunity Transformations International. The holding company usually has a majority stake and mobilizes resources from other investors and donors, such EIB, FMO, IFC, and KfW.

The report also identifies SSA as one of the three regions in the world where depositors outnumber borrowers. With 21.6 million depositors and 7.8 million borrowers, the volume of deposits at US$5.2 billion is also greater than the gross loan portfolio of US$4.7 billion.


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Role of foreign sub-market funding to PAR in MFIs

Dear all,

In 2003-4 I worked in West Africa to provide assistance on the Supervision of Micro-Finance Institutions. The region I covered concerned 10 countries. In my work I collaborated closely with central banks, ministries of finance, MF associations, MFIs and foreign donors including CGAP. I lived in the region in which I traveled extensively. Just to illustrate the credibility of my story.

Already then the PAR 30 days plus was already for years over 5%, well beyond the recommended maximum of the regional (of the 8 UEMOA member countries) central bank BCEAO.

What was clear as well is that the growth of depositors and deposits, most regulated MFIs in the region are member-based financial services cooperatives (Mutuelles d'Epargne et de Credit = Savings and Credit Mutuals), was slowing down or even decreasing. What was also clear is that foreign funding in the form of loans and investments was taking over as the main funding source. And, to continue, ALL foreign funders provided the loans and investment on conditions well below local markets did.

You don't need to be an expert to consider that such foreign social funding cannot really be put at equal terms to local commercial funding by depositors, local banks or from local more business oriented investors. You don't need to be a clairvoyant either to suspect that already then several of the largest MFIs in the region were in structural trouble and were not closed down because of continued bail-outs by foreign donors.

But as you can also imagine, nobody wanted to grasp the alarm bell and everybody wanted to continue discuss more and more massive foreign donor involvement, all renowned experienced investment bankers and micro-finance experts committed to sustained growth of MFIs and to helping the so far unbanked poor with credit. Nearly all governments created Micro-credit Ministries, taking MF out of the Finance Ministry, and they created "Solidarity Banks" in the footsteps of former President Ben Ali in Tunisia. Maybe "former president" also because his bank did not do anything to reduce unemployment and poverty!

BCEAO did become a bit worried with the increased distance from professional finance, increased politicisation and the dominating role of SOCIALLY motivated foreign financiers of MF in the region. Because, let's be honest that is what most if not all of these organisations are, even if they speak about banking and their financial instruments in a manner that staff of CitiBank and Morgan Stanley would be proud of.

CGAP had and maybe still has a leading role in this West African region; they organise the meetings with all major donors, they have regular discussions with central banks and governments, they even accompany WB/IMF Financial Sector Assessment Program (FSAP) missions, and they have individual relationships with MFIs and national associations. It is indeed the "Spider in the Web".

And as you can read in this internet magazine (MicroFinance Focus) foreign socially motivated MF supporters continue to enthusiastically announce further and even more massive "investments" and "lending" in and to MFIs. "Investing in Microfinance" has become a multi-billion dollar "industry" in North America, Europe and the Middle East. What "industry" is it in fact? Or is it in all sincerity a very effective and efficient instrument in the foreign policy and Corporate Social Responsibility (CSR, a.k.a. "buying redemption for greedy behavior") toolkit?

So why did CGAP wait until now to draw the alarm bell and will it ever officially admit that the dominance (near monipolisation) of foreign social investors and lenders bears risks for the sustainability, the continued existence, of MFIs in Sub-Saharan Africa (but also in other regions)? And when will they ever start undertaking studies on the impact on building inclusive financial sectors of such foreign social financiers? Or is that difficult to do as CGAP depends on the support of many of the same foreign organisations?

In conclusion, these are serious worries that have so far intentionally been ignored. Even if CGAP will act now, it will require a multi-year initiative undertaken by a strongly committed multi-party alliance that is led and managed by LOCAL financial authorities (and under the coordination of central governments), to turn the odds.

Yours sincerely, Peter

Peter van Dijk
BSD City, Indonesia

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