Africa Finance Forum Blog
This post was originally published on the SME Finance Forum website.
On September 9, the G20 Global Partnership for Financial Inclusion (GPFI) brought together policymakers, financial service providers and researchers to discuss key trends and gaps in agricultural finance.
The demands on the global food system are rising rapidly. By 2050 there will be an additional two billion or more people to be fed. The agricultural sector is essential for food security, job creation and overall economic growth around the world. The proposed global Sustainable Development Goals call for increasing agricultural productivity, raising small holder income and ending hunger.
"There is large untapped potential to modernize the agricultural sector and boost productivity. The G20 recognizes that expanding access to finance in the agricultural sector is crucial to achieve these goals," said Susanne Dorasil (GPFI Co-Chair; German Federal Ministry for Economic Cooperation and Development (BMZ)).
The Agricultural Finance Roundtable featured discussions around key emerging issues. What are new successful approaches to value chain finance? What are the opportunities for financial institutions to target women in the agriculture sector? Is index insurance viable for small holder farmers in emerging countries? Do we really understand the needs of smallholder farmers? How to exploit the potential of technological advances? International experts from academia and development organizations presented new research findings and policy recommendations in these areas. Five discussion papers formed the basis for the various sessions which led to the following main outcomes:
- The importance of value chains - a key ingredient for growth and scale
- Digital technology as a potential game changer
- Subsidies can be helpful, at many levels - but be SMART with them!
- Don't forget building human capital, and using expertise throughout VC
- Critical role of women in agriculture and in VCs
- Invest in better data
- Good overall legal framework is essential
A central theme of the event was the role of innovative digital technologies in transforming agrifinance. "Digital technologies have helped to lower credit risk, reduce costs and make the delivery of financial services more efficient. This has expanded the range of financial services available to smallholder families in emerging markets," said Michael Tarazi, senior financial sector specialist at the Consultative Group to Assist the Poor (CGAP).
The G20 Agricultural Finance Roundtable was organized in partnership with the International Finance Corporation (IFC), BMZ, GIZ and SME Finance Forum. The outcomes of the roundtable will form a G20 synthesis report on new trends and innovations in agricultural finance.
In many parts of rural Africa today, microcredit schemes for women are increasingly being promoted as both a solution to women's limited access to credit and a strategy for poverty reduction and women's empowerment. Microcredit is simply the extension of a small amount of collateral-free institutional loans to jointly liable poor group members for their self-employment and income-generation. In a recent paper that we published in World Development (Vol. 66, pp.335-345, 2015), we studied the empowerment benefits of rural women's access to microcredit using data from a longitudinal multi-method research that we conducted with rural women who were involved in an NGO-run micro-lending programme in Ghana. We developed a simple, yet multifaceted model of empowerment in which the empowerment benefits of women's access to microcredit were evaluated based on three main pathway matrixes: material, relational, and perceptual pathways to women empowerment.
We found that some women are empowered along several dimensions as a result of their access to credit; several other women have little control over the use of loan funds and are therefore no better off due to receiving credit; while some women are subjected to harassment and abuse due to their indebtedness and inability to repay loans, and are therefore worse off. Those women who became more empowered as a result of their access to credit were women who either were already engaged in some business venture before receiving the loan or they exercised full or significant control over proceeds from their loans. Women borrowers who became vulnerable and even disempowered were however those who either received loans to start-up new businesses but who actually failed to do so due to loss of loans to other unapproved loan uses such as direct consumption, or those who had no control over investments and earnings from their loans.
Our findings suggest that having an understanding of the nature of potential loan recipients and the socio-cultural context within which they live could be vital for the survival, effectiveness and long-term success of any microcredit programme. In some cases, access to credit is the only input needed on the road to women empowerment. At the same time, our findings also suggest that in a culture in which women have little control over their loans and income from their investments, it is a singularly poor environment to give out credit to women to start-up new businesses.
This suggests the need to focus the lending approach of microcredit schemes for rural women on a number of things. First, it might be better to focus on women who already have an income-generating activity that generates sufficient income to repay the loan. This would not only help loan recipients to grow their existing businesses and generate more income, but it would also ensure the sustainability of the schemes themselves. Second, it might be useful to first screen and determine which clients have adequate control to be able to use a loan productively. This might require moving beyond individual women to focusing on families and communities to redress powerlessness and gender-based discrimination against women. Finally, borrower groups should be encouraged to build-up their own emergency savings through small regular contributions. Such funds could be loaned out (and to be replaced later) to group members who might have legitimate reasons for being unable to repay at the time of collection. This could reduce the harassment, abuse, and seizure of assets that insolvent borrowers often experience due to other group members having to cover for them out of their own pocket.
Overall, our study suggests that empowerment cannot always be assumed to be an automatic outcome of women's access to microcredit particularly in contexts such as Ghana where women still face considerable socio-economic disadvantage relative to men. However, with adequate loan size, appropriate timing, effective monitoring, and better screening methods that avoid giving loans to potentially insolvent borrowers, women's access to microcredit does have the potential to impact positively and powerfully on their empowerment.
This blog post is based on the study Microcredit: Empowerment and Disempowerment of Rural Women in Ghana, World Development, Vol. 66, pp.335-345, 2015. Corresponding Author: Dr. John Kuumuori Ganle, Department of Geography and Rural Development, Kwame Nkrumah University of Science and Technology, Kumasi, Ghana, Tel: 0249957505, E: johnganle[at]yahoo.com
About the Authors
John Kuumuori Ganle, is a population, rural and international development researcher at the Kwame Nkrumah University of Science and Technology, Kumasi, Ghana. He holds a Doctor of Philosophy in Public Health from the University of Oxford, UK.
Kwadwo Afriyie is a Lecturer at the Department of Geography and Rural Development at the Kwame Nkrumah University of Science and Technology, Kumasi, Ghana. He holds a Master of Philosophy in Geography and Resource Development from the University of Ghana, Legon.
Alexander Yao Segbefia is a Lecturer and Head at the Department of Geography and Rural Development at the Kwame Nkrumah University of Science and Technology, Kumasi, Ghana. He holds a doctorate degree in Geography and Resource Development from the University of Ghana, Legon.
This post was originally published on the Center for Financial Inclusion Blog website.
Providing micro financial services is often a costly endeavor. As practiced in most places today, it involves many manual processes which limit the potential for scaling up and expose vulnerability to poor service, errors, and fraud. Furthermore, as telco operators and fintech companies bring services to customers through new distribution mechanisms, microfinance banks (MFBs) need to explore innovative ways to competitively deliver their services. Hence, it is promising to see a rise in the use of tablets, smartphones, and other devices housing applications that digitize field operations. Digital field applications (DFAs) offer MFBs a way to take advantage of technology to solve some of these challenges. Globally MFBs have deployed DFAs in a wide variety of ways. For example, loan officers equipped with DFAs can process loan applications and answer client inquiries in the field, eliminating paper forms, digitizing data, and saving time and money for organizations and their clients. Bringing financial services out to clients can achieve a much-needed personal touch and can even increase the richness of the client interaction. For example, client education and consumer protection awareness can be more effective when digital messages are delivered by a field staff member. DFAs can also improve credit operations. When assessing loan applications and risks, field officers can operate more efficiently if digitally equipped.
In order for MFBs to successfully leverage these tools, both for their and their clients' benefit, they must understand their business case, and incorporate best practices for implementation that have been derived from lessons learned by others. There is no shortage of pilots that have been halted due to challenges arising from lack of experience and understanding - despite hardware availability or subsidies.
With this in mind, Accion's Channels & Technology group have published a case study aiming to provide some clarity on the impact of DFA use by examining the business case, implementation process, and effects for three MFBs: Ujjivan Financial Services in India, Musoni Kenya, and Opportunity Bank Serbia (OBS). Our case study presents a consolidated review of the findings from the three MFBs, with an accompanying Excel-based business case toolkit, available for MFBs to examine the potential impact a DFA might have on their business. Individual cases presenting the findings from each institution are also available - here, here, and here.
DFAs Are a Sound Investment
When we analyzed the business case - reviewing capital and operational expenditures, cost savings, and revenues earned - we concluded that an MFB could reasonably expect to achieve breakeven between 12 to 24 months after implementing a DFA. Furthermore, although the primary motivation for implementing DFAs was in most cases to improve loan processing efficiency, all three institutions experienced a variety of benefits that went well beyond their core objective.
Key results included:
- Average loan officer case load increased by 134 percent at Ujjivan
- Loan application turnaround time (TAT) decreased from 72 to 6 hours at Musoni
- A new digital credit scorecard delivered a credit-decision in the field for 80 percent of targeted loans at OBS
Additionally, the institutions realized a range of adjacent benefits, including enhanced credit scoring and Social Performance Monitoring (SPM) capabilities, improved enforcement of controls and policies, and a reputation as market innovators.
During the study we also explored client impact and found that clients benefited from increased convenience due to a faster loan application process with fewer KYC documents required, or were notified more quickly if they were not qualified.
In studying which elements were essential for successful implementation, strong change management capability was crucial. Several key activities emerged as best practices:
- A clear understanding of the institution's requirements coupled with strategic business process reengineering ensured the solution was designed optimally to meet their needs.
- Close cooperation between MFB staff and the solution provider during planning and piloting also proved critical for successful integration and take-up, as testing with end-users revealed pain points that could be redesigned to enhance usability. Furthermore, this collaborative approach helped cultivate project champions among internal staff, an important part of organizational change management.
- All three MFBs approved contextually appropriate modifications to their DFA solutions, rather than opting for out-of-the-box functionality. For example, the decision to operate in offline mode required robust back-end integration, data storage, and CBS security, but allowed loan officers to perform certain functions in areas of low connectivity.
Overall, results from the case study were very promising, and we hope that more studies will compliment these findings. Equally important is to hear from a wider set of MFBs about their use of DFAs, and the related impact, challenges, and lessons learned.
Carol Caruso is Accion's Head of Channels & Technology (C&T); responsible for bringing innovative delivery channels and technology solutions to Accion partners and increasing sector development through advisory services and initiatives. Carol has 20 years of experience in business and IT consulting services in developed and developing countries.
African Governments have a key role to play in promoting private equity as one of the major potential sources of investments for enhancing growth and development in their countries. Areas for government intervention include the following:
Improving the legal and regulatory environment: The private-equity industry needs policies and regulatory frameworks that foster its growth. Policymakers need to have deeper understanding of the industry in order to develop these policies. Most private-equity funds on the continent are registered in countries with good regulations, and flexibility in the free flow of funds. No player wants to set up a holding company in a country with fund transfer restrictions.
Building the talent pool: Private equity is effective only when managers are prudent in using capital to grow businesses in a sustainable manner. In Africa, however, the industry is still new and the continent lacks adequate skilled and experienced fund managers. Governments should create the enabling environment for Africa to attract and retain more talent in the form of skilled and experienced managers, specifically with operational experience, in order to make the industry grow.
Creating awareness among key private-equity players: There is limited knowledge about the industry in a number of countries, as well as very little or no engagement between private equity industry players and regulators, resulting in communication gaps between them. Policymakers need to understand the issues affecting the industry, including political risk. There is, therefore, a need for greater engagement between policymakers and private-equity actors.
Improving availability of funds for the private equity industry: Finding adequate financial resources for the private-equity industry remains one of the major challenges in many African countries. This calls for an urgent need to explore how Governments could facilitate the flow of capital into private equity. Normally pension funds are restricted in what they can invest in for reasons of prudence, including even restrictions in investing in companies that are listed on stock markets. African Governments should find a way to ensure that these pension funds are invested in private equity, albeit wisely and responsibly. They are also encouraged to explore co-financing and co-sharing opportunities with other private-equity investors, in sectors such as infrastructure financing (for example energy, telecommunications and water). The Ghana Venture Capital Trust Fund is a good example of such a public-private partnership initiative, partly financed by the Ministry of Finance and Economic Planning.
Encouraging investment of local African capital into private equity: Building up private equity in Africa entails accelerating development of the ecosystem and sourcing investments from local capital markets and funds. There is a need to improve the knowledge of local African investors through education, better understanding of the asset class, incentives and the regulatory framework. Significant sources of local capital (pension funds, family offices, sovereign funds, high net worth individuals, diaspora) can be tapped both for investing and exiting private equity assets.
Encouraging more impact investments: Adequate consideration should be given to investing in sectors that could positively change the lives of many people, while making decent returns for the investors. In this regard, Governments should provide special incentives for private equity firms to put their money into sectors such as agriculture, where the majority of the poor are actively involved.
Other enabling measures to enhance the role of Governments
Enabling measures need to be specific to each country. Private equity is not exclusively driven by the size of an economy or opportunity. Some countries have policies that are friendlier to private equity-friendly than other countries. Governments need to maintain policies that allow them to foster growth. The macro, political and socioeconomic situations are the driver for an enabling environment.
Governments should therefore make the effort to implement and sustain strong macroeconomic reforms. Governments should strengthen the bond and equity markets by introducing securities-lending, encouraging new listing requirements and supporting companies for listing and post-listing, especially as there are not many companies listed in sectors such as agriculture and oil and gas. Governments are also urged to open sectors such as telecommunications, banking and insurance services for investment, as these provide key opportunities for private equity investors.
African investors cannot move around as easily as foreign investors. This deters local investment. Governments should enact policies that encourage local investors and foreign investors alike. In this regard, implementing protocols on the free movement of people and capital across the continent will be very beneficial.
Furthermore, efforts to accelerate the achievement of the objectives of Africa's regional integration in areas such as trade facilitation and infrastructure networks can greatly boost the ecosystem for private equity and for investments in general.
*If you find value in this excerpt, you may enjoy reading the full book, Innovative Financing for the Economic Transformation of Africa, a publication of the Economic Commission for Africa (ECA).
Since the late 1970s, the poor in emerging economies have increasingly gained access to financial services offered by so-called microfinance institutions (MFIs). These MFIs have shown significant growth rates in terms of providing financial services to poor households, especially during the early 2000s until the breakout of the financial crisis. Next to the growing numbers of clients, the number of MFIs went up as well. Microfinance was perceived as a successful model, both from a developmental as well as from a business perspective. Thus, not only new NGO-type of institutions, also commercially oriented MFIs, entered the market. The strong growth of the number of MFIs led to increased competition for clients and markets. In addition, over time also the orientation of many MFIs changed. Whereas in the beginning of the microfinance movement, the focus was mainly on social objectives, this changed towards focusing more on financial performance, i.e. an orientation on profits and efficiency of operations.
These changes in the microfinance landscape do raise a number of questions. How did MFIs cope with the rapid increase of clients? What has been the impact of the change to being more profit-oriented for the social performance of MFIs? Is there a trade-off between these two orientations or can they be complementary? These are all important questions the microfinance sector, as well academics, have been struggling with during recent years.
In particular, there has been a lot of discussion on the existence of a trade-off between financial and social performance. On the one hand, improved financial performance may help MFIs in obtaining more funds, e.g. by making profits and/or by attracting the attention of external investors. This allows them to provide more services to the poor, thereby raising their social performance. At the same time, however, the focus on financial performance may go at the cost of servicing the poor as this is generally more costly, both in terms of delivering and monitoring services, i.e. financial and social performance could also be substitutes.
One could investigate the existence of a trade-off by looking at the association between measures of the financial and social performance of MFI operations. If this association is negative, this may indicate there indeed is a trade-off, i.e. financial performance goes at the cost of social performance. In contrast, a positive association would support the idea that both objectives are complementary. We studied this issue by measuring the cost efficiency, which is a proxy for financial performance, of 435 MFIs during the period 1997-2007. In particular, we compared cost levels of MFIs relative to the cost levels of the most efficient MFIs in our sample. The distance between the cost levels of these most efficient MFIs and the cost levels of an individual MFI is a proxy of the (in)efficiency of its operations: the smaller the distance the more cost efficient the organization.
We measured social performance (or outreach to the poor) of an MFI by taking the average loan size per borrower (in US dollars) and the percentage of female clients of its total loan portfolio. A higher average loan size may indicate that the MFI focuses on the less poor; a higher share of female borrowers suggests a stronger focus on the poor.
Next, we looked at the association between these measures of financial and social performance. In particular, we investigated whether the cost efficiency of an MFI is related to the extent to which the MFI focuses on reaching out to the poor, controlling for a number of MFI-specific variables, which may also influence its level of financial performance. We found strong evidence supporting the idea that financial and social performance are substitutes. On average, MFIs scoring high in terms of cost efficiency provided larger loans and had fewer female clients, i.e. they scored low on reaching out to the poor. These outcomes strongly suggest that a trade-off between financial and social performance exists. In other words, on average it will be difficult for MFIs to achieve both goals. We therefore conclude that the claim made by microfinance practitioners and researchers regarding the compatibility of efficiency and outreach, allowing MFIs to achieve a double bottom line, is a myth.
This blogpost is based on the study "Outreach and Efficiency of Microfinance Institutions", World Development, 39, 6, 2011, pp. 938-948, by Niels Hermes, Robert Lensink and Aljar Meesters. Corresponding author: Niels Hermes, Faculty of Economics and Business, University of Groningen, PO BOX 800 9700 AV Groningen, The Netherlands, telephone: +31-50-363 4863; email: c.l.m.hermes[at]rug.nl.
About the authors
Niels Hermes is professor of International Finance at the University of Groningen, the Netherlands, and visiting professor at Université Libre de Bruxelles, Belgium
Robert Lensink is professor of Finance and Financial Markets at the University of Groningen, the Netherlands, and professor of Finance and Developemntat Wageningen University, the Netherlands
Aljar Meesters is post-doc researcher at the University of Groningen, the Netherlands