Does microfinance benefit economic development? Yes, according to James Mwangi, chief executive officer of Kenya’s Equity Bank. With even small loans, he told Africa Renewal, “We have seen families graduate from micro-enterprises to semi-medium enterprises.”
More and more individual and institutions worldwide are putting money into microfinance, reports the Consultative Group to Assist the Poor (CGAP), a World Bank affiliate that works with governments to expand lending to poor people.
Traditionally, microfinance loans, typically between $20 and $300, were given by non-governmental organizations (NGOs) using funds provided by donor governments. That made them vulnerable to changes in donor policies and to rigid rules about the types of projects they could finance. Then the Grameen Bank in Bangladesh established a new model that demonstrated it was possible to give loans to millions of poor people and still make a profit. It also showed that the poor can be entrepreneurial and creditworthy.
Demand still outstrips the money available. In 2007, Germany’s Deutsche Bank reported that although $4.4 bn is invested in microfinance worldwide, the amount needed is actually some $250 bn. Microfinance is now attractive for investors seeking financial instruments that are not tied up with increasingly volatile world financial markets.
Attracted by this potential, private enterprises such as MicroVest, a US fund, have poured $1 mn into Ghanaian microfinance lender Sanapi Aba Trust. Similarly, AfriCap Microfinance Fund, formed in 2001, has invested in 12 microfinance institutions in Ghana, Kenya, Senegal, Madagascar, Malawi, Mozambique, Nigeria and Sierra Leone. AfriCap, which has about $50 mn in capital, was the first Africa-based equity fund to be entirely focused on microfinance.
There have been significant results. A cash injection from AfriCap and others in Equity Bank of Kenya helped turn the formerly small microfinance lender into a major commercial bank. It now serves 2.5 million lower- and middle-income Kenyans. In 2004, the bank became the first African microfinance institution to be publicly traded. By 2006 it had extended loans of more than $106 mn, most of them to women.
And its investors have made a tidy profit. “We have seen a 7 per cent return on our assets and we have grown by 200 per cent,” says Mr. Mwangi. There is a “growing recognition that Africa has turned a corner,” he believes. “People are seeing the prospects in Africa, and strategically positioning themselves to take advantage of the continent’s growth.”
With a dual goal of making profits and helping poor people get access to financial services, private businesses are partnering with donor agencies to invest in microfinance. This is in line with the international community’s 2002 Monterrey Consensus in which heads of state recognized that microfinance is an important means for financing development in poorer countries, and said they would promote “private-sector financial innovations and public-private partnerships.”
One public-private partnership is the GroFin Africa Fund. Worth nearly $150 mn, GroFin is a consortium that includes the African Development Fund, the World Bank’s International Finance Corporation (IFC), Deutsche Bank Foundation Americas, Skoll, Syngenta and the Shell Foundation, among others. The fund plans to invest directly in about 500 small and medium enterprises (SMEs) in Kenya, Tanzania, Uganda, Rwanda, Ghana, Nigeria and South Africa.
GroFin also provides technical assistance so that small businesses can become more stable and profitable. Combining financing with business advice was a deliberate strategy, Kenneth Onyando, GroFin’s East Africa regional investment manager, said in 2007. “African SMEs too often struggle to find the capital they need because banks see them as too risky an investment,” he said. “By integrating funding with business development assistance, we are offering a viable solution to this problem — giving SMEs hope and delivering returns to investors.”
Business Partners International (BPI) of Kenya is similar. It includes the IFC, the European Investment Bank, the East Africa Investment Bank and the Kenyan private equity funds, Tran Century and CDC group. BPI set up a $14.1 mn fund in February 2006 and provides loans ranging from $50,000 to $500,000 to its clients.
Despite the growing amount of private and donor money available, “microfinance in Africa is at least five years behind, compared to South Asia or Latin America,” Sasidhar Thumuluri, an analyst for MicroVest, told an investment publication. The main reasons, he said, are “poor infrastructure, weak institutions, lack of financial and human capital.” However, he added, “recent positive changes such as establishment of democratic institutions, reverse migration of qualified professionals and improving governance in countries like Ghana are attracting greater investor interest.”
Donna Katzin, of the New York–headquartered non-profit funding organization, Shared Interest, which is working on new and different ways to fund development in South Africa and elsewhere, told Africa Renewal that success in expanding microfinance will be difficult, “where regulatory environments are not conducive.”
Another concern is that people who borrow might not pay the loans back. Ms. Katzin argues that helping clients who have problems can help them perform better and reduce the risk that investors will lose their money. By providing such assistance, Shared Interest has kept the number of unpaid loans to 3.2 per cent.
Not all people are ready for credit, Ms. Katzin acknowledges. Some are so poor that taking out a loan could get them further into debt and poverty instead of helping. “There are some countries where you would not recommend a loan scheme, because poverty is so entrenched,” she explains. “In such places, you need grants first, to get people on their feet, before graduating to other forms of capital.”
Mr. Mwangi agrees. Only once a family is able to save, Mr. Mwangi believes, can microfinance help its members reach higher goals such as creating or expanding a business. “It is at that point that you start having economic growth.”