MICROFINANCE PAPER WRAP-UP: African Financial Systems: A Review by Franklin Allen, Isaac Otchere and Lemma Senbet, Published by The Wharton Financial Institutions Center

by Franklin Allen, Isaac Otchere and Lemma Senbet, published by The Wharton Financial Institutions Center, March 2010, 69 pages, available at: http://www.microfinancegateway.org/gm/document-1.1.8282/African%20financial%20systems.pdf

The paper analyzes the economic markets in four regions on the African continent: Arab North Africa, West Africa, East and Central Africa, and Southern Africa. It covers each region’s central banks, banking infrastructure, government bond markets, stock markets and microfinance markets. The authors note that prior to the market downturn in 2008, African economies began to experience a “growth renaissance,” which is has now slowed as countries struggle to stay afloat. The authors also examine the impact of microfinance on African economies during the financial crisis. This paper wrap-up focuses on the elements of the study that relate to microfinance.

In Arab North Africa, the authors find that microfinance appears to be experiencing steady growth, with the exception of Algeria, where all microlending programs are run by the government and administered through public agencies such as the Social Development Agency. In Tunisia, the Tunisian Solidarity Bank was established in 1997 to support microenterprises by channeling funds to microfinance institutions (MFIs) whose interest rates do not exceed 5 percent per year. Morocco boasts ten MFIs, but all are limited by restrictions that prevent them from offering savings and limit them to supporting “productive activities” with loans of no more than USD 3,000 each.

In French-speaking West Africa, microfinance has had a presence in Benin, Burkina Faso, Cote d’Ivoire, Togo, Mali, Niger and Senegal for many years. There has been much growth in the industry, which has been monitored since the early 1990’s by the Central Bank of French West Africa (known by the French acronym BCEAO). There are approximately 400 financial institutions offering microcredit services in West Africa with about 3,000 branches but authors note that these services cater disproportionately to urban populations, at the expense of rural customers.

In English-speaking West Africa, Gambia began adopting microfinance operations in the early 1970’s through the creation of Indigenous Business Advisory Services (IBAS), a government agency seeking to support indigenous microenterprises. The Gambian microfinance sector has seen growth among village savings and credit associations, retail non-banking financial institutions, rural microfinance projects and commercial banks. Microfinance practitioners in Gambia so far reach 17 percent of the population and are very focused on rural women relative to their peers in other countries. Nigeria’s microfinance sector is growing in large part to the emergence of informal businesses and the reluctance of commercial banks to support them. Until recently, these businesses were funded through an informal microfinance sector that consisted of individual moneylenders and tribal credit and savings groups. Still in its infancy, the formal Nigerian microfinance industry serves 1 million clients.

East and Central Africa is known for government-sponsored MFIs. Microfinance in Mozambique and the Congo has had a great impact on the agriculture sectors by allowing farmers use loans to buy tools and seeds. Congo’s microfinance sector is said to contribute 1.1 percent to its the gross domestic product (GDP).

In Southern Africa, Namibia demonstrates a strong microfinance sector with approximately 100 registered MFIs. A microfinance support network was also launched in 2008 through the Development Bank of Namibia, which has channeled USD 4.2 million to various MFIs offering a network of 7,000 service locations in all nine provinces. Swaziland’s and Zambia’s microfinance markets are still in their infancy, with Zambia’s MFIs serving just 0.005 percent of the country’s population.

In conclusion, the authors argue that African economies are struggling but are indeed improving in part due to microfinance acting as “an important driver in the development of the economies in this region and [continuing] to play a key role as a grassroots financial tool.”

By Diana Baide, Research Assistant

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