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A Study On Sustainable Banking Banking Essay

In recent years, many African economies have begun to experience higher growth rates and increases in per capita income. The continent has witnessed high commodity prices, large scale reduction in debt, Asian investment in the continent, and economic expansion of the non oil exporting countries has helped steer this growth. Still, the number of people living below the poverty line is higher. Allocating financial services to the affected part of the population could shatter the poverty cycle. Microfinance has assumed increasing significance globally as a policy for creating employment and generating wealth for low income and unemployed people. In Africa, there has been a rapid boost in the number and types of institutions offering microfinance services ranging from non governmental institutions, commercial banks, regulated specialized providers and savings and credit cooperatives. Still the microfinance industry in most African countries remains largely underdeveloped. However, when properly harnessed and supported, microfinance can expand ahead of the micro level as a sustainable part of the procedure of economic empowerment by which the poor can raise from poverty. The main focus of this study is to scrutinize the effectiveness of microfinance and evaluate whether it proves to be profitable and sustainable activity on the African continent.

Background

The global concern for the level of poverty in Africa is renowned to all. Africa is the most affected region by the crippling problems of chronic hunger and malnutrition. The great concentration of poverty in Sub Saharan Africa is also a concerned matter for all. Despite these disappointing facts, microfinance in Africa is growing. A wide range of diverse institutions are offering financial services to low income clients in Africa. These firms include non government organizations, non bank financial institutions, cooperatives, rural banks, credit unions, Rotating Savings and Credit Associations (ROSCA), postal financial institutions, and an increasing number of commercial banks. Countries with a large number of MFIs in Africa include Ethiopia Kenya, Uganda, and Senegal. Kenya has a K Rep contributed to the microfinance growth especially in East Africa. There are an increasing number of MFIs in Rwanda, Zambia and Tanzania. Where as Uganda has the biggest outreach in the microfinance sector as a country. But in countries such as Nigeria, Libya, Tunisia, Cameroon, Zambia, Ghana, Liberia, Sierra Leone Angola and Mozambique, MFIs are of low compactness. Even though East Africa is the leading region in the microfinance sector in Africa, even there a large number of potential members are not reached yet with them. In country like Mozambique, where rural areas are categorized by low population solidity, deprived infrastructure, restricted participation of the rural poor in the fund economy and restricted diversification of income sources, is a real challenge to enlarge a sustainable microfinance program.

The AIDS outbreak, lack of familiarity with best credit, Political instability and savings practices also obstructs the expansion of microfinance in Africa. An approximate 300 million low income Africans necessitate microfinance services but only about 20 million presently have access. There are only around 20 microfinance providers (MFIs) in Africa with an outreach of 100,000 active clients. African MFIs principally finance existing businesses resulting in an insufficient access to credit for start ups. Micro and small scale built up and agro processing remain further underdeveloped owing to unsuitable technical hold up, financing and physical infrastructure. The noticeable slow improvement of microfinance in Africa is further improved by lack of adequate information on the extent of its stipulation and impact on business and employment formation.

The Evolution of Microfinance

Microfinance has existed for centuries in Africa and probably around the world. Every person, no matter how poor, needs and uses financial services every time. Many people commonly use moneylenders who generally charge high interest rates on loans. There are a lot of global examples of the history of microfinance varying from informal, small scale, revolving savings and loans clubs in Ireland, England and Germany in the mid eighteenth century to savings and credit cooperatives in Indonesia throughout the nineteenth century. In Nigeria, the record of microfinance goes reverse to the fifteenth century and was carried from there by slaves to the Caribbean. In Africa, formalization, mainstreaming and appreciation of microfinance as part of the formal financial sector began to speed up in the mid 1990s.

State of Microfinance in Africa

Microfinance had been always active in Africa, although informally. Revolving credit associations, tontines were the earliest form of microfinance; credit unions rapidly extended; and today the landscape is quite different, with individual lenders, NGOs, regulated MFIs, self managed groups, cooperatives, and even banks, providing with a extensive range of financial services. However, a devastating majority of the economically dynamic population in rural areas, so far remains excluded from the strict financial system; and even those who have admission to the financial system are still not attaining all the services they require. Historically, microfinance in Africa has expanded in different phases across the region. Financial intermediaries such as cooperatives, rural and postal savings banks pioneered the industrial sector in the 1970s, mostly in West and East Africa.

In the 1980s and 90s, the sector found massive donor supported credit only non governmental organizations (NGOs) develop and sometimes change into new types of non bank financial institutions by mid 1990s. These days West Africa is dominated by credit cooperatives, while regulated non bank financial institutions place out in East Africa and Southern Africa is mainly served by a large number of NGOs, some lower banks and newly established special purpose MSME banks. Even though the majority of reporting MFIs are regulated, the largest numbers of unregulated MFIs are situated in East Africa. However, this number is likely to decline as several Ugandan unregulated MFIs continue to take benefit of a growing regulatory environment, which allowed them to renovate into regulated deposit taking institutions.

Demand and Growth for Microfinance in Africa

The demand for microfinance in the Africa is very large and the types of services the poor and low income client's demand alter across the board. This large demand and the diversity of the microfinance clients created the necessity for building inclusive financial systems that work for the underprivileged. Poor and low income people essentially need a range of financial products and services to build income and wealth, smooth expenditure patterns, and reduce risk. CGAP counted 467 active microfinance programs in Sub Saharan Africa (SSA) during 2006. On an overall, the microfinance sector in Africa was represented by a handful of large institutions including 16 MFIs with over 50,000 loan clients each and by scores of small, young MFIs appearing in new and established markets alike. Strengthened by reforms of recent years, African microfinance attracted international focus, resulting in young start up banks, NBFIs and NGOs starting activities in Central, East and Southern Africa. In the same year, 190 African MFIs reported to the MIX: they all together reached 4.8 million borrowers with 1.6 billion USD in loans, while serving 7.2 million savers and managing 1.5 billion USD in deposits.
Microfinance Outreach

MFIs reporting to the MIX

Outreach
Borrowers (millions)
Voluntary Savers (millions)

Balance Sheet
Gross Loan Portfolio (million USD)
Voluntary Savings (million USD)
Assets (million USD)
Equity (million USD
190


4.8
7.2


1,553
1,477
2,944
686
41


1.7
0.0


641
0
734
317
1,038


57.9
67.7


24,429
16,062
34,632
5,736

SSA MENA All regions
(Source: MIX, “Selected Microfinance Indicators 2006” Feb 2008)

In 2006, growth was tremendous in certain markets and among specific MFIs. On average, credit activities of the institutions that reported to the MIX grew up by 47%, while savings services became twice in just 12 months. The highest growth in clientele was recorded in Kenya, especially among the two leading Kenyan microfinance banks that showed a combined 170,000 additional active borrowers in one year. The weighted average outstanding loan per borrower for African MFIs is US$617 in terms of depth. In relative terms, compared to GNI per capita (153%), these loans are higher than those offered in all other regions but Eastern Europe and Central Asia (EECA). MFIs in Africa often serve a mix of poor and more middle class clients in order to achieve improved cost coverage. Financial intermediaries including institutions accepting savings, specifically cooperatives, reached a higher end loan customers on the lending side usually salaried workers, while managing savings balances that were typically three to five times smaller than the credit balances they offer.

Depth of Outreach
EAP EECA LAC MENA S.Asia SSA All

Sample Size (of MFIs)

Average Loan Balance per Borrower (USD)

Average Loan Balance per Borrower (% GNI
per Capita)

131

534

44
202

2581

162
272

1126

51
41

520

30
202

137

27
190

617

153
1038

1031

85

(Source: MIX, “Selected Microfinance Indicators 2006” Feb 2008)

A unique nature of microfinance in Africa is the collection of large deposits. Unlike in most regions around the world, around more than 70% of African MFIs suggest savings for clients as a core financial service and use it as a significant source of finance for their lending activities. African MFIs barely resort to outside borrowing. Research conducted by CGAP in 2004 shows that African MFIs account for less than 21% of recipients of foreign investment, and only up to 6% of total dollars invested by international financial institutions and in private managed funds.

On the other side, MFIs in the Latin American and Caribbean, Eastern Europe and Central Asia regions inward 7 and 10 times more foreign investment, respectively. In terms of profitability, African MFIs haven't compared fare well to their counterparts existing around the world. African MFIs return on assets averages 2%, when compared to 2.5% for the Latin America and Caribbean province, 1% for Asia, 3% for MENA and 1.5% Eastern Europe. African institutions faced tremendous obstacles in reaching sustainability: low population density with a predominantly rural population, weak communication infrastructure and high labour costs compensation to employ and retain skilled personnel averaged 12 times GNI per capita, over twice as much as any other region in the world, according to (MIX).

Profitability per Region

(Source: MIX 2006 Peer Group Medians)

Supply of Microfinance Services in Africa

The market structure of microfinance in Africa region varies significantly depending on member countries stage of financial sector development, policy environment etc. However, the wider gap on the supply side is due to the lack of information on what institutions are actually accomplishing verse what they could be accomplishing. Microfinance institutions must be aware of the fact that microfinance service delivery is more complex that one could think originally, particularly in a competitive environment where clients are more demanding and educated. As a result microfinance institutions should endeavour to understand what clients need and how to deliver services and products that their clients want instead of just hoping that potential clients will avail themselves of what the institutions may be willing to offer.

Microfinance has two major long term global goals. The first is to build inclusive financial systems ensuring that all people can access the services provided by formal financial institutions and the private sector. The Bank will support its RMCs to build such inclusive financial systems in Africa. The second is to assist micro entrepreneurs working in the vast informal sector to expand their businesses into registered, licensed small and medium scale enterprises (SMEs). About 320 million people living on lower income represent the potential demand for microfinance services in Africa alone. These people can effectively use microfinance to eradicate themselves out of poverty, reduce their vulnerability to external shocks, and become prosperous. Although microfinance is not a cure for poverty, access to financial services for all people underpins the attainment of the MDGs.

This Policy and Strategy on Microfinance is intended to further guide Bank Group Operations in supporting the RMCs to expand microfinance and mainstream it into their formal financial and private sectors. It capitalizes on the lessons learned by the Bank and its development partners regarding the appropriate approaches to microfinance, including the assurance that no damage will be done to existing financial markets and that a financial sector approach will be used. The Bank document, Mainstreaming Microfinance into Bank Group Operations, this made it clear provision for the development of this Policy and Strategy.

The Microfinance Policy and Strategy for the Bank Group has three objectives, namely, to: provide strategic direction to the Bank as it extends more considerable support to its RMCs to build inclusive financial systems, which will provide a wider range of financial products and services to a big part of their respective populations
provide the Bank a means of focusing its microfinance activities in order to achieve the greatest impact within the shortest span of time, provided 2015 deadline for meeting the MDGs and elucidate for the RMCs what they can expect from the Bank in terms of support for building inclusive financial systems.

Microfinance: Tool for Poverty Eradication in Africa

There is a fundamental relation between microfinance and poverty eradication in that the latter depends on the poor gaining access to, and control over, economically fruitful resources, which includes financial resources. For the resource poor of Africa, continued existence often depends on subsistence agriculture and small income generating activities at the home or in the local marketplace. In many instances, microenterprises rather than formal employment generate an informal economy that includes around 70% of the national economy. Yet the lack of saving and access to finances creates a state of everlasting scarcity, a poverty cycle that restricts people prospective to improve their livelihoods. As already noted, the lack of financial services is not the only preventive factor in income generation other pervasive social, economic and political barriers also play a vital role.

1. Material Benefits of Microfinancing

Microfinance initiatives can play a valuable role in addressing material poverty, the physical deprivation of goods, services, and the income to achieve them. MFIs can help people become more economically protected. This, in turn, has a multiplier effect on people's pattern of living, enhancing basic household welfare, such as food security, nutrition, shelter, sanitation, health and education services. MFIs can help prevent and rescue people from debt. Credit can be used as working capital so that clients' efforts become more useful. Savings serve as reserves for important household expenditures and as insurance against immediate crises that can otherwise result in insolvency for people already living at the poverty line. In most cases low income people want to save, and have been saving in a variety of traditional ways, ranging from kinship networks to Revolving Savings and Credit Associations (ROSCAs), but lack appropriate saving conveniences that offer a combination of safety of funds, liquidity, positive real return, and convenience. MFIs can build upon Africa's traditional savings ethic to improve outreach and quality of services. It is imperative to keep in mind that for any financial service to have a lasting impact on poverty eradication, it must be flexible and innovative to adjust to their needs of its clients.

2. Non Material Benefits of Microfinancing

Microfinance initiatives offer more than just material benefits; they can also address issues related with non material poverty, which includes social and psychological effects that prevent people from realizing their potential. Microfinance initiatives individually and collectively empower people. MFIs regularly employ microfinance groups to provide training in financial management, legal rights, business management, as well as other support services. Principles of collective organization and solidarity empowered people to haggle for higher wages, better work conditions, health services, child care, and common forms of insurance to defend their lives and livelihoods. MFI participants, especially women, are often empowered to verbalize out more, assume leadership roles, and address issues beyond their workplace, such as domestic violence. For many women, the group is the first opportunity to assemble formally with other women to argue problems and develop joint action. The groups serve as a path of information.

Women Empowerment and Gender Equity

Microfinance has the capacity to have a powerful impact on women's empowerment. Although microfinance is not always empowering for all women, most women do experience some degree of empowerment as a consequence. Empowerment is a composite process of change that is experienced by all individuals some what differently. Women need, want, and earnings from credit and other financial services. Strengthening women's financial base and economic contribution to their families and communities play a part in empowering. Simply earning small amount of money, through access to capital to start a small business can increase women's self belief and empower them through greater economic independence and security. Women's financial contributions to family can fetch them more reverence from their husbands, children, in laws and extended families.

Constraints of Microfinance in Africa

Amongst the microfinance challenges that RMCs continue to face are: the deficiency of strong retail capacity in microfinance institutions this challenge is the sole biggest constraint to expanding the outreach of financial services to the poor in Africa extending access to financial services to the remotest of countryside areas in a cost effective manner the persistent impression that microfinance is a social system of resource transfers to beneficiaries at subsidized interest rates, rather than a component of the financial sector this impression explains in large part why national enabling environments still limit MFIs from mobilizing savings and prevent them from achieving financial self sufficiency due to interest rate ceilings institutional infrastructure is essential for microfinance, including service providers such as accountancy, credit bureaus, training institutes, and information technologies.

Summary, Findings and Recommendations

Generally, the African microfinance market offers sound prospects for accelerated growth, though this varies considerably from country to country. Some of the more vibrant markets will experience fast growth in the coming years; while a number of smaller countries that have no important microfinance services might have to revisit business models and sector deepening strategies. Continued development will need to be made at all levels including client, retail, macro and regional. Africa's complex situation calls for an African driven strategy to expand home grown solutions rather than relying on outside aid and assistance. The significant progress that has been made thus far holds great assurance for microfinance's potential to expand to an even greater number of Africa's deprived. The government should implement proper rules, laws and regulations in order to safe guard the interest of microfinance in high poverty driven economies like those in Africa. And also much more liberated regulations must be incorporated to loan sanctioning to poor, which enable them to grab sufficient funds for there development. So to conclude, Microfinance is performing a great deal in African continent as the most effective measure in the recent future of the continent in providing financial support to poor and to women empowerment. Microfinance has succeeded in eradicating poverty to some great extent in the continent for its prosperity and development.

REFERENCE

1. Anupam.B, Rodolphe.B, Murat.Y.,(2004), Microfinance in Africa: Experience and
Lessons from Selected African Countries, IMF Working Paper African Department.

2. Calgagovski J., V. Gabor, M.C.Germany and C.Humphreys (1991), “Africa's Financing Needs in the 1990s” in I.Hussain and J. Underwood (Eds), African External Finance, World Bank, Washington D.C.

3. GRAEME.B, (1997), Microfinance in Africa: Is it Either the Problem or the
Solution, Department for International Development, London, UK.

4. Microfinance in Africa: Combining the Best Practices of Traditional and Modern Microfinance Approaches towards Poverty Eradication,[online] www.microfinancegateway.org/gm/document 1.9.36579/10.pdf

5. Sarita.G, (2008), Microfinance in Africa: Harnessing the Potential of a Continent, Microfinance Insights.

6. Ted.B, (2001), Microfinance and Poverty Alleviation in South Africa, Bay Research and Consultancy Services.

7. The Consolidation Imperative in Africa: World Microfinance Forum Geneva October 1 2, 2008

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