Micro Finance Institutions offer more accessible capital and credit, Photo Courtesy: The Conversation
Note: This is the first of a three parts series titled, “Unlocking Africa’s MFI cashbox”
The African continent has a lot of ‘idle money’, yet very little of it is available to lend at a large scale. Most Africans pride themselves on keeping their finances close and are community oriented. Traditionally, some African communities used to hide their cash in the folds of their ‘shukas’, under the mattress, or in big metal boxes. These boxes and lockboxes are the places where many of the village savings and loan associations used to keep their cash. Susu Clubs – West Africa – and Chamas – East Africa – are the groups that used to operate as informal community banks, and they still exist to date in some of African countries.
In Liberia for instance, susu clubs number more than 1,000 and represent a tight-knit financial web in which intimate connections allow for flexible terms of service. Most Liberians — urbanites and rural dwellers alike — boast membership in more than one club. They gather their savings and lend to members and non-members to enable them meet household and business needs. Club relationships are deep and accountability is high; one club member hosts the box in his or her home, and five others hold keys to open its locks. They gather periodically to deposit new cash and deliberate on lending requests.
In East Africa, and specifically Kenya which is the most advanced credit market in East Africa, banks account for almost 90% of the loans advanced in the country. Domestic credit to the private sector stands at 39%. In West Africa’s commercial banks, the same case applies. Despite the youthful population growing appetite for credit services and digitized services, most of the banks have scaled back their presence in impoverished areas. Most banks in the country cater to large foreign-owned businesses.
Microfinance institutions (MFIs) have made major strides towards filling the gap between banks and consumers. They have also played a crucial role of expanding financial access for the world’s most vulnerable groups. Historical samples have shown that MFIs operating in markets with the highest microloan transaction volumes have successfully attracted investment capital from traditional institutional investors. This has been important in reducing dependence on public financing and philanthropy. They have done so through securitization of microloan portfolios (a tactic that has been adopted from the world of high finance). In as much as most of these models have not been fully implemented in African countries, securitization has the power to catalyze financial inclusion in the growth capital. With the ideal legal and institutional framework, microfinance securitization can also be used to help develop each of the country’s capital markets and facilitate efficient allocation of resources across the growth continent – Africa.
The evolution of MFI in Africa since 1997
MFI has grown to be the link between traditional finance and well-resourced commercial banks. In a research done in 1997, Bangladeshi economist, Muhammad Yunus, conceptualized microcredit as a loan scheme for a group of women in the village of Jobra, India. A decade later, he founded Grameen Bank to formalize the scheme — and pioneered the microcredit industry. By 2006, the bank’s assets had grown to $6 billion in outstanding loans to micro, small and medium enterprises (MSMEs) in developing countries.
Over the years, microcredit has evolved into microfinance. MFIs now offer poor households and businesses an expanded array of services beyond microcredit. These include everything from mobile money and micro savings to microloans and micro insurance – which is a component of microfinance that is growing fast in Africa. The sector is attracting a growing number of active borrowers looking for a simpler way to leverage their projected income to obtain small but personally significant amounts of credit. In Liberia for instance, women make up 98% of Liberian MFIs’ nearly 310,000 active borrowers, with more than $5.5 million in loans.
Initially, microcredit institutions depended on subsidies from public investors, international development agencies and philanthropic foundations. Then came securitization, invented in the 1970s to create liquidity on the balance sheets of mortgage lenders in the Americans by pooling housing loans and issuing securities backed by those loans. Investors in these securities received a promise of cash flows that would be channeled to them from borrowers through a special-purpose vehicle (SPV), less a servicing fee. By the late 1990s, microfinance loans had joined credit card receivables and car loans on the growing menu of assets used to back debt and equity instruments. For the securitization of microloans, microfinance investment vehicles (MIVs) serve as SPVs. Issuing both equity and debt instruments, MIVs provide an avenue for institutional investors with an appetite for exposure to microfinance, and they give MFIs more affordable resources for onward lending.
MFIs have shown their poverty reduction capacities around the globe. In Bangladesh, they helped significantly increase household incomes for micro borrowers, lifting 2.5 million people out of poverty between 1991 and 2011. That amounts to a 10% decrease in poverty over a 20-year period. It is expected that the same effect will be felt on Africa. For many, microloans have simply helped them meet basic needs, such as health care and education. Their impact, therefore, has leaned more toward providing some financial stability for households to subsist in poverty rather than immediately transcend it.
Written by Kennedy Muturi @kenmuturi5