Sub-Saharan MFIs and the Region’s Booming Economy

> Posted by Joseph Smolen, Summer Associate, CFI

Are MFIs evolving enough to maintain relevance as a driving force in the sub-Saharan African (SSA) economy?

A recent survey of board members of microfinance institutions (MFIs) in SSA revealed two shortcomings at the governance level: 1) MFIs boards and leadership are not effectively incorporating new technologies and 2) there is a systemic lack of awareness related to market forces and competition. Taken together, these two areas of deficient governance suggest MFIs are not evolving quickly enough, and definitely not at the rapid pace of economic growth in SSA.

Which leads us to ask: are MFIs at risk due to their slowly evolving, and sometimes insular, business practices? The answer to this question is an emphatic no….for now. MFIs have been and will continue to be a key driver of economic growth, poverty alleviation, and financial inclusion in the region. However, sub-Saharan Africa is experiencing unprecedented growth, catalyzed by a variety of macro-level influences. This new dynamism in SSA (the second fastest region-wide growth, behind only developing Asia) brings with it faster change than previously seen in the SSA economy. What does this mean for microfinance? Simply that evolution has now become more critical than ever.

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The economic changes in SSA bring with it myriad opportunities – both for domestic residents and foreign investors. Most striking is the increasing eagerness for foreign direct investments (FDI) in SSA. Currently, FDI has taken the form of large-scale investment in established institutional players with little effect on the lower income customer base of MFIs. As capital flows continue to seek opportunities, this could easily change, and other players could contest the space MFIs have historically occupied in the marketplace. While financial services to previously excluded individuals does not necessarily have to be provided by MFIs, there are significant risks that the microfinance space will be impinged upon by mainstream market players such as commercial or mobile banks as well as non-mission driven debt funds. The consequences of such changes include:

  • Non-mission driven institutions are not as focused on client-centricity
  • This can result in a variety of lending failures with regards to traditional MFI clients who are traditionally first-time borrowers – the most worrisome of which is over-indebtedness
  • There is no guarantee that all borrowers who previously would have been serviced by MFIs will qualify as clients for more “traditional” institutions.

While these risks exist, at this time they all are mostly theoretical. MFIs in Africa have a distinct competitive advantage over future market entrants – they, and their incumbent infrastructure, are already going concerns with millions of customer relationships. However, the time to act is now. MFIs must actively look for ways to adapt and improve general business practices, such as:

  • Ensuring up-to-date technology
  • Information sharing with strategic partners and competitors to ensure use of best practices
  • Pursuing aggressive client outreach to grow more efficiently and secure a larger base of customers
  • Utilizing financial instruments to leverage capital and increase placements in the marketplace (e.g., securitized debt pools)

Microfinance’s position as a cornerstone of capital flows to excluded market sectors is currently not under threat. The brisk pace of financial growth in SSA could rapidly change that. This is reinforced by the TNDA results, which highlight that MFIs have not been adept at adaptation and evolution, making them susceptible to market disruption. Accordingly, before other market entrants, especially those that are not mission driven, enter the financial services space in SSA, it is necessary that MFIs address their self-assessed weaknesses – striving to improve and modernize business practices on a consistent basis.

Have you read?

Agriculture Microinsurance in Africa: To Subsidize or Not to Subsidize?

Greenfield Microfinance in Africa – Where to from Here?

Governance by Trust: Philosophy or Fluke?