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Microfinance Capacity Building Facility for Sub Saharan Africa (“MICFAC”)

A Regional Approach to Expanding Access to Finance for the Poor by DFID & World Bank

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Paradigm Shifts in the Microfinance Sector

Poor people demand and are willing to pay for deposit, credit, transaction banking, insurance, money transfer and other financial services;

Ongoing access to (and usage of) affordable and appropriate financial services helps poor families to: deal with shocks (internal and external); wide variations in cash in-flows and out-flows; and opportunities to increase income and assets;

The development sector has made a fundamental contribution in demonstrating poor people’s demand for financial services and how these can be addressed;

Huge opportunities for leveraging technology, scale and efficiency; Large scale delivery of financial services needs mainstream human resources and

capital and most of this can be attracted only on commercial terms; Policy makers, central bankers can greatly facilitate the development of

microfinance as a vibrant part of the mainstream financial sector.

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“Access to financial services can mean the difference between surviving or thriving” (G20 Leaders Statement, 2010)

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Limited Access to Financial Services in Sub Saharan Africa An average of only 20% of the population of Sub Saharan Africa has

access to formal financial services; Less than 10% have access in some of the poorest countries; Banks are inaccessible to the majority; Microfinance can help to bridge this access gap; Demand for microfinance is high and remains largely unmet; Penetration rates of Microfinance are very low in most countries.

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Access Strand in Selected Countries

4

60

45

41

23

21

19

18

15

14

12

12

4

2

18

18

2

7

3

12

7

4

1

10

2

8

27

24

19

17

12

26

27

10

26

52

33

33

53

55

62

62

52

56

78

RSA '09

Nam ibia '07

Botsw ana '09

Kenya '09

Nigeria '08

M alaw i '08

Uganda '06

Zam bia '05

Rw anda '08

Tanzania '09

M ozam bique '09

Form al - Bank Form al - Other Inform al Financ ia lly exc luded

Source: Data extracted from FinMark Trust and Finscope www.finscope.co.za

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Low Outreach of Deposit and Loan Accounts from Commercial Banks in SSA

163

28

317

38

818

201

737

258

2022

701

0

500

1000

1500

2000

2500

Deposit Accounts Loan Accounts

Per

Th

ou

san

d A

du

lts

Sub Sahara Africa South Asia Middle East and N Africa Developing Countries High Income Countries

Source: Financial Access 2010, CGAP and the World Bank Group

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Multiple Constraints to Improving Access to Financial Services

Product constraints- Physical accessibility- Appropriateness - Affordability

Contextual Constraints- - Demographic and poverty pressures- - Complex political organization- - Poor level of infrastructures- - Financial sector culture- - Public interventionism

- Inadequate political coordination

Systemic constraints- Skewed delivery infrastructure- Lack of financial sector data- Lack of credit information - Absence of an integrated ID system- Skills shortage

Regulatory constraints- Mobile payment regulation- Know Your Customer- Interest rate caps - Secured transaction law - Bankruptcy laws- MFB regulation

Source: OPM 2010

Amongst the Biggest Challenges facing Microfinance in Africa

are Capacity Constraints.

Despite facing such challenges, some microfinance providers have shown dramatic growth in Sub Saharan Africa.

UNDP defines ‘capacity’ as “the ability of individuals, institutions and societies to perform functions, solve problems, and set and achieve objectives in a sustainable manner”.

Building capacity therefore covers a broad range of initiatives at different levels of intervention:

human capacity;organisational capacity;institutional capacity.

Source: //uk.oneworld.net/guides/capacitybuilding

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Capacity Building in the Microfinance Sector

Developing human capacity or the capacity of individuals: developing skills in individuals to enable them to carry out/improve certain functions in the microfinance field;

Developing organisational capacity: improve the operating systems of microfinance providers (e.g. products, delivery channels, internal structures, processes) and its ability to successfully deal with challenges emerging from changes in scale of operations and the operating environment;

Developing institutional capacity: improve the broader set of formal rules and informal norms that provide the framework of incentives within which microfinance providers operate.

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Which level of intervention should MICFAC focus on?

DFID and the World Bank recognise that there are significantcapacity constraints at each level.

The challenges of tackling capacity constraints at each leveldiffers.

It is proposed that MICFAC should FOCUS on building human and organisational capacity.

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Missing Graduates in Africa

4766

4434

696

0

1000

2000

3000

4000

5000

6000

Asia Sample Latin America Sample Sub Sahara Africa Sample

Tertiary Graduates per million population

Series1

Source: World Development Indicators

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3 out of 5 Top Risks in African Microfinance are Capacity Related

Rank Global response Africa

  2008 2009 2008 2009

1 Management quality

Credit risk (10) Too little funding Management quality (2)

2 Corporate Governanc

e

Liquidity (20) Management quality

Staffing (7)

3 Inappropriate regulation

Macro-economic trends (24)

Credit risk Corporate Governance (6)

4 Cost control Management quality (1)

Managing technology

Credit risk (3)

5 Staffing Refinancing (27)

Inappropriate regulation

Macro-economic trends (-)

Note: Major risks facing the microfinance industry as identified by practitioners, investors, regulators and deposit takers (2008 rankings are in parenthesis in the 2009 columns); Source CSFI

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Diverse Providers of Microfinance in SSA

Typology of Providers reporting to MIX Market: Bank; Rural Bank; Non-bank financial institution; Non-Governmental Organisation; Cooperative/credit union.

In addition, Microfinance is provided by: Community based groups (e.g. VSLAs/ ROSCAs); Integrated programmes supported by Government and/ or

development agencies.

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The Microfinance Providers in SSA are Facing Many Challenges Portfolio quality, profitability and productivity lag behind global averages; Difficult to attract and retain managers and skilled personnel; MIS systems and internal controls are underdeveloped; Financial Products don’t fully reflect user’s priorities; Large number of small, inefficient and poorly performing organisations; Evolving legal and regulatory frameworks require adaptation by

microfinance providers; Few mature microfinance providers consolidating and expanding to new

markets within the region.

MFIs recognise that strengthening their human and organisational capacity is crucial to their sustainability and growth.

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Diverse Suppliers of Capacity Building Services Academic institutions; Specialist training programmes; Specialist service providers; Embedded services (e.g. investment and TA); International networks; Donor projects; Government initiatives; Solo consultants/trainers; In-house provision.

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The Capacity Building Providers in SSA are also Facing Many Challenges

Users of capacity building demonstrate variable ability and willingness to pay;

Insufficient service providers of capacity building (single serious provider in some countries);

Multiple weaknesses in microfinance providers (e.g. weak ownership/ governance impacts on articulation of strategic capacity building priorities and its links to the business plans of microfinance providers);

Impact of capacity building inputs are not always clear in the short term; Variable ability of service providers to specifically respond to the context of

microfinance providers and provide tailor made solutions (in terms of relevance, location, language and prices);

Weak institutional framework for capacity building provision (lack of standardisation, certification and market clearing i.e. linking demand and supply for capacity building);

Microfinance draws from a number of related markets to reduce its skills deficit (e.g. auditing, information technology, market research) but many of these markets are also very shallow.

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Capacity Building Demand Exceeds Supply

The overall level of skills gap in SSA is high and the demand for capacity building services to build skills is high;

Some examples of fully commercial capacity building transactions; Many microfinance providers seek to deliver commercial and profitable microfinance but

have not as yet achieved this; Microfinance providers under-invest in staff capacity (as high skills deficit and staff

retention a problem); History of extensive subsidies has increased the gap between demand and supply of

capacity building services (if the price is zero, demand tends towards infinite); Many large donor capacity building initiatives have been completed, although there is

increasing demand (new microfinance providers are emerging and existing providers are expanding);

There are a number of existing donor funded capacity building initiatives, which either focus exclusively, or in part, on the institutional level or support to specific models and providers;

Few existing capacity building initiatives focus systematically at human and organisational capacity with a long term, market development perspective.

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Capacity Building is a Dynamic and Interconnected Process

MANAGEMENTQUALITY

Service Providers (Trainers,

Consultants)

Qulity of Staff (Recruitment,

Induction & Training)

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Capacity Building is Much More Than TrainingIndividual Level Self study/ learning; Learning on the job; Mentoring Exposure Visits; Workshops;Organisation Level Interaction with peers, customers, investors, regulators, auditors etc; Dedicated task teams; Action Research/ market Research; Technical Assistance.

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Examples of Management and Technical Competencies NeededManagement Strategic thinking; Promoting vision and values; Good governance practices; Product development and operations; Managing people, activities projects/resources, quality and information;Industry and Technical Industry/ Product knowledge; Understanding customer needs; Technical and operational knowledge; IT systems and applications; Management of customer and business relationships; Administrative processes; Contracts and negotiations; Risk management; Audit.

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MICFAC Vision

Accelerated access to financial services in Sub Saharan Africa Take microfinance to scale in Sub Saharan Africa on a sustainable

basis; Address binding constraints in human and organisation capacity to

enhance quality and quantity of financial services available; Leverage opportunities to create livelihoods in Sub Saharan Africa,

especially in post conflict environments; Reach rural, poor and unreached clients; Enhance opportunities to address practical and strategic needs of

women (in their various roles as customers, staff of microfinance providers, managers and owners);

Use smart subsidies to seek higher leverage, efficiency and value for money;

Make capacity building and financial services markets work better.

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MICFAC Strategy

Strengthening the organisational and human capacity of existing banks, MFIs and other providers (e.g. SACCOs/ VSLAs) to sustainably serve poorer/ unbanked clients;

Increase the supply of microfinance providers to serve new clients and new markets;

Increase the quality and supply of capacity builders.

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How will MICFAC Work? - Approach Take a long-term, market development approach to capacity development Avoid supply-led provision/market distortion Identify and leverage internal / external incentives for organisations to improve

capacity (e.g. work with regulators and investors). Respond to demand driven funding requests demonstrating:

Ownership/ governance; Proposals’ fit with strategic organisational priorities e.g. links between product

features, distribution and training; Post project sustainability plans; Regional perspective; Cost sharing; Likely impact on:

market actors not supported (does it crowd in or crowd out the private sector?);

social performance; Mechanisms for monitoring/performance assessment.

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Benefits of MICFAC’s Regional Approach

Enable small financial markets to access scale economies e.g. rating agencies, specialist training programmes and payment systems;

Increase efficiency and competition by increasing the number and types of financial organisations leading to greater choice and lower prices for microfinance clients;

Expand the scale and opportunities for intermediation between savers and investors;

Support moves towards regional economic integration and promote harmonization of business practices, laws and institutions/ policies;

Facilitate greater diversification of assets and markets to diversify risks for microfinance providers.

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Examples of MICFAC’s Regional Approach Microfinance providers leverage regional economic

integration to expand operations within the region; Microfinance providers respond to regional migration

and offer regional remittances products either directly or in partnership with other providers;

An academic centre/ training programme offers courses for middle and senior managers on a regional basis;

Market analysis and knowledge sharing on a regional basis.

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Regional Approach of MICFAC: How?

Offer MICFAC resources to several countries from the same economic region;

Allocate MICFAC resources to its most promising use in the region (funds not restricted to a single country);

Work through relevant regional bodies (e.g. central banks, training centres, Regional Economic Commissions);

Ensure that the economic and social benefits of the MICFAC investment “spill over” national boundaries;

Structure/ locate MICFAC team(s) on regional basis; Facilitate cross-border learning.

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How will MICFAC Work? - Channels Separate windows/ funds for working with:

providers of financial services primarily: focused on scale and efficiency; focused on sustainably serving the poorest

Capacity builders Work with aggregators/ organisations already committed and networked to

expand delivery of financial services to the poor: Successful/ promising microfinance providers going to scale in Africa; International microfinance providers (including “South-South” providers); Investors/ Development Financial Institutions; National Microfinance Networks/ Apex Cooperative organisations; Commercial Banks downscaling (including move into neighbouring countries); Partnerships and linkage banking; New models of delivery (branchless banking/ partnerships between banks,

telecom companies) Work with capacity builders (in consultation with users of capacity

building services to ensure demand focus).

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How will MICFAC Work? - Implementation Arrangements I Independent Facility; Management Firm Model, based in Africa; Phased Regional implementation Approach; Operate in 39 IDA countries in SSA; Project Duration (at least 5 years); Priority Economic Groupings (e.g. EAC, SADC, UMOA,

CEMAC, etc.) to be determined; Balanced regional representation (Anglophone/Francophone/

Lusophone; conflict affected countries).

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How will MICFAC Work? - Implementation Arrangements II Funding decisions, typology and size of different funding

windows informed by: market analysis links between providers of financial services and capacity building

services; Micro, meso and macro context;

Seek out/ invite and assess proposals; Fund and oversee approved projects; Monitoring and Evaluation; Knowledge Management; Mobilise additional funds for MICFAC; Linkages with other programmes.

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COMPONENTS SAMPLE ACTIVITIES

1. Strengthening capacity ofmicrofinance providers (criteria

to beestablished in the design)

Grants: Mgt skills/governance; new products dev; MIS/risk mgt tools, IT platform improvements, regulatory compliance – seminars/workshops with regional entities

2. Increasing supply of microfinance operations to serve new clients and new markets

Grants: Scoping for cross-border expansion; bank downscaling initiatives

3. Strengthening supply of skilled labour and service providers

Grants to strengthen regional Centres of Excellence to offer quality training (e.g. improve curriculum, certification, training materials, expansion to new markets and topics)

Proposed Components and Activities of MICFAC

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Potential Areas of Collaboration with Others

Co-funding of MICFAC with other donors; Collaboration with other initiatives to complement MICFAC

activities (in particular at meso and macro levels); Knowledge sharing and lessons learning with private sector,

government bodies and donors.

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Proposed Calendar for Next Steps

Stakeholders’ Consultations: Phone Call with MFW4A A2F Group: 1 Oct 2010; AFMIN in Accra, Ghana: 5-9 October 2010; On Line Consultation (to “go live” in early October 2010);

Phase 1 feasibility study to peer reviewers: October 2010; Phase 2 Design Study to be finalized by December 2010; MICFAC Launch: Early 2011.

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Thank You

For Feedback/Suggestions, please contact:

Korotoumou OuattaraKouattara@worldbank.org

Angus Kirk A-Kirk@dfid.gov.uk

Zahia Lolila zlolila@worldbank.org