Written by Anne-Lucie Lafourcade, and based on research conducted by the MIX: Microfinance Information Exchange on 119 African institutions from 24 countries. This report was released in November 2007 as a 12-page publication of MIX Microfinance Information Exchange Inc. available here.
The growth in microfinance in Africa was inconsistent in 2006 with some regions experiencing dramatic growth in credit while others experienced decline. Kenya experienced the highest growth in credit clientele with an average loan portfolio increase of fifty percent. MFIs in Southern Africa experienced a 59 percent growth in their loan portfolio due to an increase in loan sizes and expansion of services in urban areas. Benin experienced the most declines, with a loss of thirty thousand loan clients in twelve months.
According to this study of the African microfinance sector, 2006 showed a high demand for deposit and savings services with savings services doubling in twelve months as opposed to credit services which increased by only one third. For MFIs offering both credit and savings deposit services, client savings covered ninety percent of loans, and were able to leverage their capital four times over. NGOs, which do not accept client deposits, were the most dependent on donor funds.
Currently, the African microfinance sector is mostly controlled by a handful of large institutions with sixteen MFIs having a total of over fifty thousand loan clients each. The larger institutions were more profitable and displayed the lowest financial and operating expenses. Institutions with loan portfolios of USD 8 million and higher were able to serve clients for as little as 0.23 for each US dollar lent.
Due to weak infrastructure and high labor costs, only one third of the African MFI benchmark participants were self sufficient, with an average loss of 2.4 percent in assets. The wages to employ and retain skilled personnel is an average of twelve times the GNI per capita, which is more than twice as high as any other region in the world. In Southern Africa, personnel and administration expenditures accounted for 35 percent of assets, with they average MFI spending over 0.72 for every US dollar outstanding.
MFIs targeting the poorest clientele were the least profitable due to a very high cost structure and failure to adjust interest rates to a cost-recovery level. Cooperatives remained plagued by low yields due to regulated low interest ceilings. Larger loans improved efficiency and increased profitability of African MFIs in 2006 while MFIs that lowered their loan sizes experienced a decline in efficiency and profitability. MFIs that targeted small businesses and higher-end clients were more than able to recover their costs with an average financial self-sufficiency (FSS) rate of 104 percent. Loans of less than two hundred US dollars had operational expenses of over fifty percent, while larger loans starting from three thousand US dollars had operational expenses of less than twenty percent. Offering sustainable financial services to the poorest clientele remains a big obstacle in this region.
Another challenge faced by the African microfinance sector is improving portfolio quality. African MFIs struggled to recover past due loans with 22 percent of the sampled MFIs having a portfolio at risk (PAR) of greater than 30 days over 10 percent. Weak credit culture, inadequate product design, ineffective recovery methods, and tough economic conditions are important factors contributing to declining portfolio quality. The African microfinance sector is divided between large, sustainable, efficient institutions and smaller, inefficient MFIs that have yet to achieve scale. As the MFI sector continues to grow in Africa, one of the major obstacles to overcome in achieving profitability is cost efficiency, especially in reaching poorer and more remote clients. Overall, the African region is showing increased availability of sustainable financial services with a growing number of institutions achieving scale and profitability.
By Melissa Duscha
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