By Basu, A., Blavy, R. & Yulek, M. (2004)
http://www.imf.org/external/pubs/ft/wp/2004/wp04174.pdf
Abstract
The author compares the experiences of 4 African countries: Benin, Ghana, Guinea and Tanzania and identifies patterns that may guide public policy in the microfinance sector.
Some key issues highlighted by the author are:
- MFIs engaged in financial intermediation have been more successful than those specialized in credit or deposit-taking.
- MFIs complement effectively the banking sector in extending financial services. Most of them have been successful due to their ability to draw on the experience of community-based approaches and preexisting informal methods.
- Linkages between banks and MFIs have been growing, thus, the government must design an adequate framework for licensing, regulating and supervising these institutions, in order to prevent any potential systemic risk.
- Governments' constraints to develop such frameworks are: lack of capacity and skills at the MFI and government level and the lack of individual records and credit history in the microfinance sector.
Summary
Microfinance in Africa has the following key characteristics:
Emphasizes deposit collection. MFIs in the 4 countries considered by this study have been successful in mobilizing savings. For example, in Guinea and Benin, the main driver of the rapid increase in MFIs membership and loan activities was the fast growth of deposits.
Follows a community-based approach. In Benin by 2003, savings and loan cooperatives reached the equivalent of 10% of non-central government commercial bank deposits. In Guinea these institutions only had 1.5% of commercial bank deposits; while in Ghana it was 6%. Tanzania, where only 6% of the population holds a bank account, cooperatives and MFIs have 60% of commercial bank deposits.
Adapts traditional informal systems to collect savings and credit repayments. They formalized traditional practices, such as the susu system in Ghana, which focuses on savings products and includes individual savings collectors that go house by house or business by business getting the small amounts from their clients. Also, ROSCAs and savings and credit 'clubs' run by an operator are popular.
Complements group and individual savings and credit programs. Village Banking is probably the most common one, although a number of institutions are seeking to expand their activities to achieve sustainability. They promote the use of (group and/or individual) savings with an attached (individual or group) credit scheme; thus, utilizing deposits as collateral for loans.
Increasing linkages between commercial banks and MFIs are taking place. This has enhanced the prospects for financial deepening. MFIs increase effectiveness with more access to financial services that improve their liquidity management (i.e. credit lines in case of difficulties) and banks, when working with MFIs, expand their client base. MFI's usually act as a link between the banks and the informal sector and with smaller businesses.
Role of Donors and NGOs Ai NGO support of lending schemes has been criticized for the potential adverse effects on the operations of MFIs, which could weaken financial discipline, increase dependence from donor funds rather than deposit mobilization. According to the authors, donors could encourage saving mobilization emphasizing full intermediation by supporting capacity building in physical and human resources.
Role of Governments Ai Several countries have relied on state-owned banks to extend rural credit and microfinance services, with a vast number of failed experiences. Thus, governments have now preferred to concentrate on financially viable approaches to microfinance or on developing regulatory and supervision frameworks to support these activities. Most of the regulating experiences went from lax systems which sooner or later led to major restructurings and the development of stricter regulatory environments and a supervisory role.
According to the author the key elements to keep in mind when designing the new framework are:
- Evidence suggests that frameworks for licensing, regulating and prudential supervision need to be well adapted and flexible, according to the stage of development of the sector in each country. Some countries have dedicated entire regulatory frameworks that for the different types of MFIs, while others like Benin regulate credit-only institutions according to individual agreements with the Min of Finance.
- Size and linkages between MFIs and commercial banks should be consider when designing the regulatory framework in order to avoid systemic risk.
- Supervision efforts differ widely in the four countries studied in this paper. In Benin, several on-site inspections occur during the year, but in Guinea the supervision effort has been limited by its own institutional capacity. Among the minimum prudential rules for larger institutions include capital requirements, risk concentration limits, liquidity limits and well-defined provisioning requirements.