> Posted by Julie Fawn Earne, Senior Microfinance Specialist, IFC
The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.
A good number of greenfield MFIs in Sub-Saharan Africa now have sufficient track records to enable an analysis of their institutional performance and role in the market. A stocktaking of their experiences to date can help inform decisions that will shape the coming generation of investment in African microfinance. Could this business model play a central role in increasing financial inclusion on the continent, where currently only about a quarter of adults have access to formal financial services?
But first, let’s start with the context. Financial services in Sub-Saharan Africa (SSA) are provided by a disparate group of relatively small providers. At one end of the spectrum are indigenous NGOs and informal microfinance providers. On the other end are commercial banks, which offer a full range of banking products and services but generally exclude the vast majority of the population. Between these two poles are cooperatives, government institutions, such as postal banks, and other non-bank financial institutions, which fill some of the gaps but have failed to reach widespread sustainability and outreach. According to the MIX Market, in 2009 less than half of the MFIs in SSA (of all institutional types) demonstrated financial sustainability. As a result, few of these institutions are likely to grow to meet the needs of large numbers of unbanked households and enterprises.
In light of this, a number of global holding companies and investors, largely comprised of development finance institutions (DFIs) set out around the turn of the Millennium to develop a group of well-managed, sustainable, and commercially-oriented formal financial institutions that offer a range of financial products through a scalable operating model. Today, there are more than 30 greenfield MFIs spread over at least 12 African countries, including frontier markets such as the Democratic Republic of Congo, Cote d’Ivoire, and Liberia. While many greenfield MFIs are still young, the analysis in Greenfield MFIs in Sub-Saharan Africa: A Business Model for Advancing Access to Finance, published last month by IFC, CGAP, and The MasterCard Foundation, shows signs of solid institution building for the longer term. While there is a range of microfinance providers in SSA, the proliferation of greenfield MFIs expands the commercial end of the spectrum with regulated, mostly deposit-taking institutions, focused on low-income individuals, microenterprises, and small businesses. At the end of 2012, 31 greenfield MFIs had more than 700,000 loan accounts, an aggregate loan portfolio of $527 million, and close to 2 million deposit accounts with an aggregate balance of $445 million. At the end of 2012, collectively they employed more than 11,000 local staff and had 700 branches.
The goal of greenfields is to develop sustainable microfinance institutions, and so financial performance is very important. The research shows that greenfield MFIs have typically been able to sustain fairly rapid revenue growth over their first 60 months, increasing on average by $500,000 every six months and reaching $5 million by the five-year anniversary. Around month 42–48 most emerge fully self-sustainable. Yet, all this comes at a cost. Initial investments for each institution average around $7 million in combined equity and technical assistance funding in the first 3-4 years. The sponsors and investors of these greenfield banks did not invest and take on high levels of start-up venture risk to create a handful of boutique banks for the poor. Rather, the promise of this model lies in the ability to leverage strong foundations to serve the market and reach scale. Few commercial MFIs in Africa have been able to do this through enterprise lending and savings products, as opposed to consumer finance.
So the primary question on hand is how does this proof of concept give way to mass market sales and shareholder returns? There are three promising paths to growth.
Organic growth: Many greenfield banks have begun to successfully segment the market and tailor products and services for the micro, small, and medium-sized segments. Business models that span the MSME segments are often able to sustainably include a greater cross-section of the market, using revenues from larger clients to subsidize smaller ones. At the same time they cultivate a pipeline of clients that will eventually grow and graduate.
Partnerships are often motivated by the emergence of alternative delivery channels and technology based solutions, which require broader collaboration between the banking and technology sectors. Many greenfields are beginning to invest heavily in alternative delivery channels. To maximize this investment, partnerships can help expand reach and leverage complementary capabilities of the partners. Regulated banks provide credit risk analysis and secure regulatory compliant deposit management, while technology partners bring best practice marketing, distribution, and agent network management.
Acquisitions: The shareholding of greenfield MFIs has been very stable so far, but it is possible that the market will see more movement in the ownership of these entities. Return on equity for some greenfield MFIs is in excess of 25 percent, motivating interest from local investors. The heavy initial investment from DFIs during the foundation stage is envisioned to give way to local investors interested in minority or majority roles. It is also possible that the market could see sales of entire greenfield entities or networks as commercial banks seek to enter growing markets in Africa and look to the early success of pioneers for the combination of an immediate geographic footprint, license, and staff with relevant skills for the market segment.
After almost 15 years in the making, the greenfield microfinance model has laid down strong foundations in Sub-Saharan Africa. This should be a good ground for further growth.
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