Microfinance on the rise: Finding the strategy for extending finance

With low levels of banking penetration and chronic challenges facing entrepreneurs wishing to access credit, one would have expected Côte d’Ivoire to be fertile ground for microfinance. However, it has not had as big an impact in Côte d’Ivoire as in some other developing countries. The nation only has 75 approved microfinance institutions (MFI) compared to some 350 in Senegal, its smaller regional neighbour.

STRONG START: Microfinance first appeared on the scene in 1976 with the creation of the Caisses Rurales d’Epargne et de Prêts puis de Coopératives d’Epargne et de Prêts (CREP-COOPEC), a network of cooperative savings and loans institutions particularly aimed at rural development. Following the economic difficulties of the 1980s, the sector was restructured and enlarged in 1994 and the regulatory framework was strengthened over the years that followed.

The IMF estimated that by 2006 there were 91 MFIs active in the country, serving over 900,000 clients, while deposits stood at CFA72.8bn (€109.2m) and total lending amounted to CFA31.2bn (€46.8m). By this point, the CREP-COOPEC was – and remains today – the dominant player in the sector with a market share in excess of 80%. A decade of political turmoil and economic under-performance would ultimately, take their toll on Ivoirian microfinance, however.

GETTING A GRIP: Since the financial scandals of 2008, the sector has tried to improve standards and rebuild trust, with some limited success. A new regional law governing the Decentralised Financial System (Système Financier Décentralisée, SFD) was published in 2008, and implemented in Côte d’Ivoire in 2011. This law introduced higher reporting and auditing standards and strengthened the role of the Central Bank of West African States (Banque Centrale des États de l’Afrique de l’Ouest, BCEAO). Traditionally, the microfinance department of the Ministry of Economy and Finance has been responsible for authorising and regulating all but the largest MFIs. Since the implementation of the new SFD law, however, all new MFI licences must go through both the BCEAO and the ministry for review and approval. The Banking Commission arm of the BCEAO has responsibility for regulating those MFIs with more than CFA2bn (€3m) in deposits or loans. Supervision is, however, deemed highly challenging due to the inferior quality of data from many MFIs.

IMBALANCE: The clear saving capacity in Côte d’Ivoire is not matched by sufficient capacity to lend. By year-end 2012, for instance, there was approximately CFA100bn (€150m) in savings at MFIs, but only CFA25bn (€37.5m) in lending. The sector is generally characterised by poor management and financial performance. The sector as a whole was in negative equity of CFA12bn (€18m) by year-end 2012, reflecting the accumulation of losses over a number of years. Losses directly attributable to the 2010-11 political crisis, through vandalism, theft and defaults, for instance, are estimated at CFA1.2trn (€1.8bn). Due to lack of capacity, data on non-performing loans are of doubtful reliability and could vary from previous estimates. CREPCOOPEC, with its more than 80% market share, is considered to be in a particularly precarious financial position, undermining confidence in the wider MFI sector. At year-end 2011, there were 867,745 MFI clients in the country, showing the extent to which the sector had stagnated over the previous half decade. These factors demonstrate the urgent need for both recapitalisation by government, donors or investors and for the development of management expertise.

RESTRUCTURE NEEDED: While the authorities have already done much to develop microfinance, and further far-reaching reforms are under discussion, the sector as a whole is still in a state of flux and in need of significant capacity building to make it fit for purpose. Many MFIs, for instance, do not have sufficiently professional management structures. Perceptions of the sector have, moreover, been damaged over the past decade by a string of controversies, including several notable examples of Ponzi schemes between 2004 and 2008. During the country’s decade of political strife, its MFIs were not exposed, or had only limited exposure, to the latest developments in microfinance globally – new capital or best practices. A number of MFIs were also forced to shut their doors during this period while a number of donors and investors departed. Addressing these institutional weaknesses will be crucial if microfinance is to develop and play its full role in the country’s economic development.

In collaboration with the UN Development Programme (UNDP), in early 2012 the government published a draft microfinance strategy outlining steps for developing the sector over the coming years. The draft strategy covers the proposed restructuring of existing institutions, such as financial strengthening, fundraising and capacity building. In March 2013 the director-general of the Treasury arranged a workshop to discuss elaborating the new microfinance strategy. In this context, a financial inclusion survey had been carried out in 2012 with technical support from the UNDP to evaluate the supply of and demand for financial services among target populations. While an overarching vision and key signposts for the strategy were set out, details are still lacking and the core priorities remain unclear. There is a need to move on from an outline strategy to develop a concrete action plan, such as laying out the role of relevant donors and partner organisations. The strategy is expected to set out a five-year plan for developing the sector and focus on people earning low incomes and those living in rural areas. It is expected to cover a range of financial services, including savings, loans, money transfer and micro-insurance.

IN SUPPORT: In addition to providing logistical and technical support, the French Development Agency (Agence Française de Développement, AFD), along with the UN’s Capital Development Fund (UNCDF), have been among the most important investors in Ivoirian MFIs. Oikocredit is another important investor, but the total number of players is currently limited. Since the return of political and economic stability, however, there have been expressions of interest in entering the Ivoirian market from further microfinance investors and MFIs. It is hoped that this will see an influx of both capital and expertise over the coming years.

Outside of the CREP-COOPEC network, which accounted for 82% of deposits and 70% of lending in 2010, the MFI sector is fragmented. Although some are established as limited companies, notably newer greenfield players like Microcred and Advans, the mutual model predominates. Urban areas are best served by MFIs, as they are more traditional financial service providers. Abidjan alone accounts for around 60% of CREP-COOPEC clients, indicating the extent to which rural areas lack access even to microfinance.

The sector is characterised by a poor rate of transformation of savings into loans. This is especially seen in the dominant CREP-COOPEC network, as other MFIs have far better transformation rates. The fact that other funding sources are limited, if not absent entirely, is a strong constraint on lending given the legal requirement for longer-term lending to be backed at least 50% by long-term funding sources.

Loans, often of short duration and for small amounts, average CFA400,000-500,000 (€600-750). Interest rates at MFIs range from 13% to 27%, on top of which high rates and commissions are typically charged. This structure also lacks transparency.

Mutual MFIs will often also require that borrowers have in their savings accounts an amount ranging from 30% to 50% of the loan, a stipulation that serves to limit demand for loans. Although the range of savings products on offer is more diverse, deposit rates rarely exceed 3.5%, and the mode of calculating interest payable can also be opaque.

In some quarters, mobile banking services and prepaid cards are seen as offering competition to the MFIs in attracting deposits. Some MFIs, notably CREPCOOPEC, have begun to offer a wider range of services, including money transfer, bank cards and insurance. Advans and Microcred, moreover, benefit from partnerships with larger financial groups Société Générale de Banques en Côte d'Ivoire (SGBCI) and Planet Finance, respectively, and with insurance providers.

NEW GROUND: In March 2012 Advans, a venture capital firm specialising in microfinance, opened its first Ivoirian branch in Abidjan, bringing the number of African countries in which it operates to six. The International Finance Corporation invested $1m in the venture and provided another $1m to support capacity building. Advans can also draw on other shareholders’ expertise, like AFD and Ivoirian market leader SGBCI.