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Enda inter-arabe: Making the Case for Micro-Finance

28.02.2011Michael Cracknell

Current troubles in several Arab countries have led to serious job losses. Self-employment through micro-enterprise supported by micro-credit can provide one solution to this. But micro-credit itself is today under scrutiny.
The international NGO, Enda inter-arabe, has been operating in Tunisia since 1990. It began micro-credit in 1995 and has been specialised in supporting micro-entrepreneurs since 2001. Today, Enda inter-arabe has 60 branches throughout Tunisia and employs 770 people, of whom some 640 are young university graduates, a category desperately in need of jobs. With a portfolio of some 80 million Tunisian Dinars (41.11 million Euro), Enda currently serves 160 000 people, 73% of whom are women. With a growth rate of 30% per annum, it expects this number to rise to 300 000 by end-2012.

Having begun with grants from the European Union and the Spanish cooperation agency, Enda inter-arabe is today self-sufficient. Its income covers all costs and it is refinanced by commercial loans from Tunisian banks and international financial institutions.
Twenty-five per cent of Enda’s portfolio is now in rural areas and includes local shops, artisans and other categories, as well as agriculture. Enda plans to introduce loans for animal rearing and for agricultural production. There are also loans for home improvement and to assist with back-to-school expenses. These can also be used for adult training courses.
Since the “father” of micro-credit, Mohamed Yunus, won the Nobel Prize in 2006, the micro-credit industry has come under scrutiny and doubts have been raised about its ability to help the poor grow out of poverty. Many claim the cost of micro-credit is  exorbitant and this is certainly true in some cases.

So is micro-finance effective in helping the poor? Studies tend to show that access to credit at least allows the poor not to get poorer while the alternative - money lenders - costs much more. Yet there are many potential pitfalls in the microfinance industry. Serving tiny loans to multiple clients is very expensive, the risk is high, refinancing is costly, inflation eats away at capital... A lack of rigour in management and especially failing to ensure a repayment rate of at least 95% can lead to a culture of non-repayment that dilapidates capital. There is also the risk of providing loans that are too large, with the risk of over-indebtedness and, again, non-repayment.

There are, however, many examples of successful micro-credit initiatives and there is now the risk of throwing out the baby with the bathwater by lumping together the efficient with the inefficient providers.

Given the current questioning of the real impact of micro-credit on poor people, it is essential for the industry to respond. The focus must be on the many and real success stories to counterbalance the failures and weaknesses - and there are also many - that the press tends to focus on.
As Enda and many others have shown, properly managed, Micro-Finance Institutions that stress their social mission of providing the poor with access to financial services, do assist the poor and help them manage the poverty equation.
An important aspect of micro-entrepreneurship is empowerment of women. Once women generate even a small personal income, they gain a say in family affairs and in dignity. With rising unemployment, the female micro-entrepreneur sometimes even becomes the main family bread winner.
To conclude, it is unfair and unrealistic to expect too much from this single sector as a path out of poverty. It is most effective as a complement to efficient government poverty-relief policies. To the contrary, structural adjustment programmes, by severely reducing services to the poor, like health and education, have shown themselves to be the path into poverty.

The debate on micro-credit should be placed in context.

Michael Cracknell is British. He co-founded enda inter-arabe in 1990 with his Tunisian wife, Essma Ben Hamida. He has degrees in Arts, in Political Science and in development studies, as well as a Doctorate of laws. He was Secretary General of the Paris-based International Federation of Agricultural Producers for 12 years ending in 1985 and has worked as a consultant for FAO, IFAD and other UN organisations.

Effective Financial Intermediation: Key to Zambia’s Sustainable Growth

31.01.2011Caleb M. Fundanga

The Zambian economy has continued to recover from the effects of the global economic crisis. In 2010, real GDP is estimated to have grown by 7.1 percent from 6.4 percent in 2009, far exceeding the target of 5 percent for 2010. This was largely driven by the continued strength of the agricultural, mining, and construction sectors, and a rebound in the tourism sector.

However, Zambia, like many other sub-Saharan countries, has been grappling with the problem of low domestic savings needed to enhance economic growth and development. Excessive reliance on foreign savings to finance investment is highly unsustainable as evidenced by the decline in Zambia’s foreign private investment inflows to about 7.2% of GDP in 2009 from 16.7% of GDP in 2007, due to the global financial crisis.   

Over the long term, greater reliance on domestic resources is critical if Zambia, like other African countries, is to develop more resilient economies. Domestic savings and investment in Zambia, and many other African economies, are low. Investment has thus been financed mainly through foreign savings. One of the reasons for this has obviously been low income levels and a narrow tax base. Another important constraint has been that of low financial intermediation.  

However, the potential of savings in rural areas is high and, if captured, could help redress the situation.  

The issue of high lending rates has become topical in Zambia. After the liberalisation of the economy in 1991, the Government moved away from financial repression by abandoning the administrative controls on interest rates. This means that lending rates are determined by the forces of demand and supply in the credit market, overcoming the inefficiencies that resulted from financial repression. An important effect of this repression in the credit market was that it limited the supply of credit while at the same time increasing demand when the rates were set below the market equilibrium level. This partly led to credit rationing and thus limited the ability of financial intermediaries to effectively use their roles to contribute to economic growth and development.  

In a liberalised financial market environment, the Central Bank contributes to the reduction in lending rates by reducing inflation. The Government also contributes by implementing prudent fiscal policy, thus limiting the crowding out of the private sector by the Government. This should reduce the cost of lending to the private sector.  

A key factor that commercial banks take into consideration in determining lending rates is the risk of default arising from the poor credit culture in the economy in general. To help  resolve the problem, the Bank of Zambia, through the financial sector development plan, has facilitated the establishment of a credit reference bureau which collects information on borrowers that is  used by credit providers. It is hoped that this will lead to a fall in default rates and thus increase intermediation.  

The response of commercial banks to the factors outlined above has been slow. Therefore, another avenue taken by the Central Bank to achieve lower rates is the stimulation of competition in the financial system. In this regard, the number of commercial banks registered in Zambia has increased from 13 in 2002 to 18 at end 2010. It is envisaged that as competition in the banking sector increases, banks will be more innovative in attracting savings from the unbanked public, especially in rural areas, and making their operations more cost effective. This will lead to competitive pricing of banking products and services and enhance financial intermediation.  

For its part, the Zambian Government has tried to address the problem of low financial intermediation through the implementation of a financial sector development plan. With 67 percent of the population having no access to financial services, effective financial intermediation is inhibited. There are a number of factors that can be attributed to this, including high transaction costs associated with opening bank accounts and low outreach by existing financial institutions, especially in rural areas. As there are very few banks outside urban areas, most people in rural areas have limited access to finance.  

In 2011, the Bank of Zambia aims at further reducing inflation to lower levels. The decline in inflation and Government securities yield rates should, in the coming periods, contribute to a decline in banks’ lending rates and thus stimulate borrowing by the private sector. These efforts are expected to be complemented by efforts aimed at enhancing financial inclusion, including financial literacy and improving the supply and outreach of innovative banking and financial services. These efforts will go a long way in improving financial intermediation, which will in turn contribute to sustainable growth in Zambia.

Income Inequality and the Growth of Africa’s Financial Sector

16.01.2011Kupukile Mlambo

In the 1980s and 1990s, most African countries embarked on a series of structural and policy reforms in the financial sector as part of overall economic reforms. The goal was to revive restart economic growth while improving economic and financial sector efficiency. 

Initial reforms in the financial sector included the abolition of explicit controls on the pricing and allocation of credit, reducing direct government intervention in the financial sector. They also included a relaxation of controls on international capital flows and the determination of interest rates by the markets, rather than government. The second generation of financial sector reforms focused on structural and institutional constraints, such as improving the legal, regulatory, supervisory and judicial environment, restoring bank soundness, and rehabilitating financial infrastructure. The impact of these reforms on Africa’s financial sector was generally positive and a result is that financial depth on the continent has improved. A conductive business and investment environment as well as the improvement of   financial systems have now begun to attract foreign capital, although this is directed mainly at natural resources.

The impact of the reforms on the reduction of financial inequality has, however, been questioned. For sub-Saharan Africa, the proportion of the poor surviving on less than $1.25 per day has hardly shifted between 1981 and 2005, falling from 53% to 51% between the two periods. In South Asia, which is a relatively comparable region with Africa, the poverty head count ratio fell from 59% to 40% between the two periods. Not only is poverty in Africa high but inequality, as measured by the Gini-coefficient, is also high. For the period 1992-2007, the Gini-coefficient for Africa averaged 0.44, while that for Latin America and the Caribbean averaged 0.51. But the figures for Africa also show a large variation in the Gini-coefficient between countries. Cote d’Ivoire and Tunisia have the lowest average Gini-coefficient (0.41) while Cameroon and Lesotho have the highest (0.54). In general, the level of income inequality in African countries has been very high and rather consistent over the period.

A functional financial system fosters the accumulation of capital, improves economic efficiency and thus promotes long term growth. This, a number of writers have stated, has been the case in Africa. The impact of the development of financial systems on income distribution and poverty reduction, however, remains a matter of debate. Some argue that more developed and freer markets have widened the availability of credit, allowing the poor to invest in their human and physical capital, and also establish small businesses. By widening the financial opportunities available to the poor, the development of financial markets has helped reduce income disparities.  

Indeed, most empirical research gives substantial support to the view that financial development reduces income inequality. One such study finds that when the financial sector is underdeveloped, inequality increases with financial markets development. However, as the economy, and the sector, develop and enters an intermediate and later a mature phase in which more people gain access to the financial sector, incomes rise while income disparities are reduced.       

Others, however, argue that while this view may seem plausible, it is not based on any real evidence. They, indeed, go so far as to say that this ‘development’ of Africa’s financial sector may in fact have raised income inequalities on the continent. While the well-to-do have had the capacity to seize the opportunities created by this development of the financial markets, they argue, the poor have been left in a limbo as they have failed to obtain equal access to credit due to their lack of collateral and connections, among other factors.  This development of the financial markets may thus actually have worsened income inequality on the continent.

Similarly, Banerjee and Newman (1993) and Galor and Zeira (1993), for instance, suggest a linear relationship between financial development and income inequality. Their view is that financial market imperfections such unaffordable transaction and contract enforcement costs; hold down the poor, who lack collateral, credit histories and contacts. As such, even when the poor may have projects from which high returns can be expected, they may still find it difficult to obtain appropriate levels of credit. This reduces the efficiency of capital allocation and limits the social mobility of the poor. Under such circumstances, income inequality rises with the development of financial markets.

It is against this background that I and my two co-authors, Francesco Guidi of the Department of International Business at University of Greenwhich and Michael Enowbi Batou of University of East London, embarked on what we believed was the first study on the relationship between financial development and inequality based purely on Africa countries.

In particular, we sought to investigate whether financial development in Africa has had an impact on income inequality, drawing on the experience of the continent’s financial reforms amid a very high and persistent level of inequality. Our purpose is to investigate whether the developments taking place in financial sector as a result of financial reforms can reduce the persistent level of inequality. The sample comprised of 22 out of 53 African countries for which we had data on inequality indices. We found this dataset sufficient for the analysis. The length of the dataset, covering the period 1980 to 2004, also allowed us to gather a good number of observations within each country. The findings of the study are in the paper titled Financial Development and Income Inequality: Evidence from African Countries.’

Our findings still showed that high levels of financial development tend to reduce financial inequality. Indeed, our results showed that a 1 percent rise in financial development is associated to a reduction of income inequality between the ranges of 0.02 to 0.05 per cent. However, we found no evidence supporting a direct relationship between financial sector development and the growth of income inequality. We also found that improved education was also a major contributor to the reduction of income inequality, suggesting that spending more on education and expanding coverage would have a substantial impact on the distribution of income.

It is our belief that in trying to widen access to the financial markets, targeting especially those in the lower income cohort and the rural populations will help to reduce the persistent income inequality that exists in African countries.     

From these findings, we believe it is important that financial policy designs take into account issues of poverty and inequality.

Lessons for Bank Regulation from the Impact of the Global Crisis in Africa

13.12.2010Louis Kasekende

The global financial and economic crisis exerted a serious macroeconomic impact on the economies of sub-Saharan Africa (SSA); average real GDP growth in 2009 fell by more than 4 percentage points compared to the annual average in the five preceding years. Nevertheless, the banking systems in most countries of SSA weathered the crisis without major damage. Unlike many of the advanced countries and some of the emerging markets, SSA avoided a systemic banking crisis. Banking systems in SSA remained both solvent and liquid. Many commentators have attributed this to the lack of integration of SSA banking systems into global financial markets; a somewhat incongruous conclusion given that international banks dominate the banking systems in many SSA economies.

Less attention has been paid to the strength of prudential regulation in SSA and the contribution which this made to maintaining banking system stability on the continent. It is now recognised that weaknesses in prudential regulation in the advanced countries contributed to the financial crisis. Regulators in advanced countries employed “light touch” regulation in which most of the emphasis was placed on capital adequacy requirements which proved vulnerable to “gaming” by banks, enabling them to ramp up leverage and operate with very little equity capital. In several important respects, SSA bank regulators imposed stricter prudential regulation than did their counterparts in advanced countries.  I will use the bank regulations in Uganda to illustrate these points but Uganda is not unique in SSA and its regulatory framework is qualitatively similar to that of many other SSA countries.

Many SSA countries impose higher statutory minimum capital requirements than do advanced economies; for example Uganda imposes minimum tier 1 and total capital to risk weighted asset ratios of 8 percent and 12 percent respectively, compared to the Basel minimum of 4 percent and 8 percent respectively which was the standard in advanced economies. In addition, SSA regulations impose much stricter standards in respect of the quality of tier 1 capital; for example, banks in Uganda must deduct all intangible assets when computing tier 1 capital, hence there is little scope for meeting the tier 1 capital requirement other than with paid up equity capital and retained earnings.

In contrast to bank regulations in the advanced countries, SSA countries did not put excessive emphasis on (an arguably flawed) capital adequacy requirement. Although capital adequacy requirements play an important role in bank regulation in SSA, they are complemented by other prudential regulations, in particular restrictions on the composition of banks’ asset portfolios and their business activities which are designed to curb risk taking. Uganda imposes restrictions on large loan concentrations, on the trading activities of banks (such as trading equities) and on foreign exchange exposures. Uganda bank regulations also restrict dividend distributions when a bank’s capital is impaired or close to being impaired. Loan loss provisioning requirements are stricter, with less scope for deducting collateral values (which are often difficult to realise) from the value of non performing loans which must be provisioned for and a requirement for a general provision irrespective of the performing status of the loan. Uganda also imposes a minimum liquidity requirement.

Stricter prudential regulations did not prevent dynamic growth in SSA banking systems in the 2000s, a period in which several SSA countries experienced credit booms. In the five years from 2004 to 2009, bank credit to the private sector in Uganda expanded in real terms at an average annual rate of 20 percent. However stricter prudential regulations did help to ensure that the rapid credit growth did not lead to financial fragility in the banking system and they also ensured that banks business activities remained focused on supplying traditional banking products, such as loans to the private sector, which are the priority for the development of SSA economies, rather than proprietary trading activities.

The Basel Committee on Banking Supervision has drawn up proposals for strengthening bank regulations at the global level which in some respects move the global minimum standards towards the standards already in force in SSA. Minimum tier 1 capital requirements will be raised, banks will not be allowed to count intangible assets towards tier 1 capital (to raise the quality of capital), a capital conservation buffer, a countercyclical capital buffer and a liquidity requirement will be introduced. In the United States, restrictions are being re-imposed on banks’ proprietary trading activities. Bank regulations in SSA are not perfect and will need to be upgraded in the years ahead to meet evolving challenges to financial stability, but it is fair to conclude that the stricter approach taken by bank regulators in SSA, compared to their counterparts in advanced economies, contributed to the resilience of the banking system in the face of the worst global financial crisis in more than half a century. African bank regulators got the basics right.


Dr. Louis A. Kasekende is the Deputy Governor of the Bank of Uganda. He began his five-year term in this position in January 2010. From May 2006 to 2009, he served at the offices of the African Development Bank (AfDB), in Tunis, Tunisia, as Chief Economist.

Is the current fuss about SME finance justified?

15.10.2010Christian von Drachenfels

The proposition that dynamic private sector development is essential for poverty reduction holds true especially for less developed countries in Africa. It is argued that small and medium enterprises (SMEs) constitute the backbone of the economy and are seedbed of innovation, thus holding the potential to raise nationwide productivity and create jobs: the comparative lack of competitive SMEs in several African countries, a phenomenon known as the “missing middle”, is therefore a constraint for economic development.

Constraints for SME development in Africa are manifold. Recently, however, there has been a stronger focus on the weakly developed financial systems and the resulting inefficient financial intermediation in several African countries. Empirical research and surveys among SMEs confirm that lack of access to finance is indeed clearly hampering SME development in Africa. This limited access to finance is often referred to as the “mesofinance gap”, the supply gap of finance between microfinance and the financing available to large enterprises.

The increasing efforts of governments, donors and private actors to address the “mesofinance gap” in Africa are therefore a welcome development. Such efforts range from governments’ use of partial credit guarantee schemes to donor-managed funds targeted at SMEs, and have been bolstered by private foundations’ focus on SME finance. These efforts are backed on the global level and most prominently by the G-20 commitment to increase support to improve access to finance for SMEs in developing countries.

As mentioned above, these activities are in general a welcome development. An important critique, however, remains: despite the wide-ranging discussions about SME finance, the debate about a common definition of “SME” continues to be absent, and the role of the sector in economic development is often inadequately understood. Policymakers justify SME policies on the basis of the assumptions described above; yet, when trying to define the target group, different quantitative criteria – ranging from the number of employees to turnover – are used to define SMEs. This quantitative definitions, however, do not tell us much about the competitiveness or the growth potential of specific enterprises in this segment. Addressing the problem of the “missing middle” in Africa does not mean that we need policies that aim at promoting enterprises with a specific number of employees and a specific turnover. The challenge is to promote and make finance available to those enterprises that are innovative, dynamic and competitive. These are the kind of enterprises that currently lack access to finance because of market failures, but can generate jobs and help reduce the productivity gap vis-à-vis the global benchmark.

So, are recent efforts just much ado about nothing? Clearly not. They are based on the important insight that the “missing middle” and the “mesofinance gap” are a serious problem for the socio-economic development of many African countries. Market failures lead to credit-worthy enterprises not being able to get access to the finance they would need for further development. Addressing these market failures is the key challenge for governments, donors and private actors. This is, however, a major challenge, and the risk remains that many current SME finance activities will be at least partly ineffective if they do not adequately deal with the challenge of disentangling the heterogeneous group of SMEs.


Christian von Drachenfels is a Research Fellow at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE), Dept. V: "World Economy and Development Financing".



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