Africa Finance Forum Blog

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Gravatar: Paola Granata, Katie Kibuuka and Yira Mascaro

Reducing the Cost of finance and Enhancing Financial Inclusion in Africa: Policy Options

18.05.2015Paola Granata, Katie Kibuuka and Yira Mascaro

On average, lending spreads are higher in Africa than in other developing countries. Several government have reacted by establishing lending rate caps, yet these administrative measures can be counterproductive because interest rate ceilings do not ensure lower long-term lending rates and can adversely affect financial inclusion. In fact, lending institutions can react by simply increasing other service costs to recoup lost income. Moreover, lenders can stop servicing riskier segments of the market (such as MSMEs) if the cap does not adequately compensate operating and other costs.

In a recent paper "The Cost of Financing in Africa: Policies to Reduce Cost and Enhance Financial Inclusion", we analyse the main components of spreads and explore a wide set of reforms that can help lower the cost of finance and ultimately increase financial inclusion while avoiding the negative effects of interest rate controls.

In a nutshell, we found that operating costs and mainly personnel costs tend have the lion's share of spreads in African countries (akin to other developing countries). This may be the result of combination of typical features of African financial systems such as concentrated banking systems, high lending risk premia, and higher upfront investment requirements to expand outreach. We also found that investment patterns have a significant effect on lending spreads. African banks tend to invest relatively more in government securities, perhaps reflecting higher profitability compared to lending operations that inherently incur much larger expenses and carry more risks, particularly in some African countries. Therefore, lending interest rates can be driven upwards to compensate for the opportunity cost of investing in securities.

We argued that policy makers have a wide set of policy reforms at their disposal to lower the cost of finance (and increase financial inclusion) while avoiding the negative effects of interest rates controls. In the paper, we group these policies into seven categories: (I) production/operating costs, (II) regulatory costs; (III) credit risk; (IV) alternative banking business; (V) profitability and return on capital; (VI) macroeconomic stability and country risk; and (VII) enhancing financial inclusion. The list of reforms presented in the paper (and related country examples) is not exhaustive, but it is intended to illustrate the wide array of options available when seeking to lower the cost of finance.

Policy makers aiming to reduce financing costs should prioritize reforms that promise the biggest impact based on country circumstances. Policies related to operating costs and profits could potentially have a big impact given their large share in the interest rate spreads. Accordingly, the following measures are crucial: improving the business environment to reduce transaction costs, such as: improving insolvency/creditor rights and suitable collateral frameworks; promoting agency and mobile banking to reduce costs associated with increased access in rural and scarcely populated area; reducing the cost of borrower information (e.g. through effective credit information systems). Reducing infrastructure costs and insecurity are also key measures to reducing operating costs in Africa. And, increasingly relevant, promoting non-bank financial institution growth enhances competition and contestability within the banking sector while directly increasing financial inclusion of underserved segments (for a more complete list please see paper).


This blogpost is based on the paper "The Cost of Financing in Africa: Policies to Reduce Cost and Enhance Financial Inclusion", prepared by Paola Granata, Katie Kibuuka, and Yira Mascaró from the World Bank.

Gravatar: Excerpt from Facilitating SME Financing through Improved Credit Reporting

Constraints to SME Financing

18.05.2015Excerpt from Facilitating SME Financing through Improved Credit Reporting

Though the constraints are many, limited access to finance and the cost of credit are typically identified in SME surveys among the most important ones. (...) As a result of these constraints, SMEs (...) rely more heavily on informal sources of finance, such as borrowing from family and friends or from unregulated moneylenders.

One important element behind the SME "credit gap" is the information asymmetries between external creditors and SMEs. (...) However, it needs to be noted and recognized that there are several other micro and macro factors that also inhibit adequate external financing for SMEs (...). The most relevant of these other factors are described briefly below.

Some of the obstacles to SME financing are associated precisely to their own nature as smaller companies. This includes factors such as lack of critical economic size, and the somewhat informal and generally less sophisticated management of SMEs. In the first case, relatively small average loan volumes may not warrant the costs of targeted credit risk analyses that are required in the absence of more standardized and comprehensive credit data.

As for the second factor, from the perspective of lenders most SMEs lack the understanding of developing a coherent and acceptable business plan to underpin their credit/loan application, and if a loan is granted they often fail to provide robust updates or progress reports on the unfolding of the business plan.

Some macro factors that act as poor business enablers include lack of adequate legal and enforcement protections for creditors, like bankruptcy laws that favor debtors' rights in a non-equitable manner vis-à-vis creditor rights, weak definition of property rights that hinder pledging property as collateral, and in general weak contract enforcement. Problems like these tend to be more acute in developing countries.

Other macro factors that recently are believed to have affected the ability and/or willingness of creditors, in particular from banks, to engage with SMEs include the restructuring of many national banking sectors after the financial crises that emerged in 2008, and the bank solvency regulations in the Basel II and more recently the Basel III Capital Accords. On the latter, several studies have found that the Basel III risk weighting approach to calculate capital requirements, which is basically the same as that of Basel II, encourages portfolio concentrations in assets like government bonds, mortgages and lending between banks. It also favors lending to companies with an external credit rating of A or above, practically all of which are large companies. When these methodologies to calculate capital requirements were introduced in the early 2000s with the Basel II Capital Accord, many banks started withdrawing from SME lending and reduced overdrafts, thus driving SMEs to alternative financing like factoring, securitized receivables, leasing and trade credit.


* If you find value in this excerpt, you may enjoy reading the full publication, Facilitating SME Financing through Improved Credit Reporting from the Report of the International Committee on Credit Reporting chaired by the World Bank.

Gravatar: Lokesh Kumar, Nishant Kumar and Anil SG

Mobile Money and Microfinance: A Match Made in Heaven or Marriage Gone Awry?

13.05.2015Lokesh Kumar, Nishant Kumar and Anil SG

This post was originally published on the MicroSave website.

Use of mobile money in microfinance seems to be an idea whose time has come. It has also figured in our publications as potentially the next big idea in financial inclusion (see Can MNOs Lead the Way for Banking the Excluded 1 and 2 as well as Mobile Money - Influencers of Success and Speculation on the Future of Financial Services for the Poor in India). On the face of it, it seems to be a "no brainer" as it offers tremendous value propositions for all parties involved. These propositions are the basis of a few such partnerships that took place in India.

MicroSave has been closely involved to study such partnerships in India. The most recent one was pilot test in Uttar Pradesh between a large MFI and an MNO. However such partnerships have not yielded expected results. In most of these cases, MFI and MNO partnerships are built on following assumptions: 

  • "Option C" (see diagram) was chosen for partnership due to limited other alternatives.
  • MFI provided initial support in marketing and building customer-MNO relationship.
  • MFI repayment was positioned as the anchor product with additional services like saving, payments and fund transfer.

Challenges in Mobile Money for Microfinance Uptake

Clients are reluctant to pay mobile money charges: MFI is in business of extending loans at clients' door step with largely manual approaches. Clientele are low income and often they are not quick to adopt new technology. In addition, they are highly cost conscious. As long as these charges are lower or equivalent to the current transaction cost (including opportunity cost), they are likely to shift to this option; otherwise, they are unlikely to do so. Clients living close to an MFI's branch in particular are unlikely to see any compelling reason to shift to mobile money.

Initially partners wanted to test the water and understand clients' inclination to pay the MFI repayment fee. But when clients were reluctant, neither MFI nor MNO wanted to bear those charges. MFI viewed clients' mobile money usage and subsequent efficiency gain and additional revenue generation (if any) only in the long run. While the MNO had to bear cost of channel management and did not want to forego revenue. Also, it considered that as a channel partner, the MFI should either bear the cost or at least pressure clients for mobile repayments. But the MFI feared that pressuring clients could impact their credit business.

  1. No compelling anchor product: MFI repayment was not a compelling enough anchor product to pull customers to use mobile money. MFI clients are accustomed to their manual repayment process and for economic reasons outlined above do not want to shift to the new channel. Other products like saving, remittance, mobile recharge and bill payments could not be pitched as most partnerships faltered in the initial stage.
  2. Low penetration of MNO points:Even when clients wanted to try MNO for repayments, (typically where branches were far from the centre - the meeting point of MFI client groups), they demanded that the agents should not be more than two-three kilometres away from the centres. But for the MNO, this would require considerable investment in infrastructure, training cost and other expenses to set up agents. The HelixInstitute of Digital Finance estimates that the total cost of setting up an agent varies between $300->1,000 depending on the market in which they are operating. Some of these costs are borne by the agents themselves and their master agents, but MNO still has to make significant investments. MNO wants to see the proof of a business case before investing, whereas MFIs insist that business would only come if there are enough points close to the users.


Though most of the partnerships have failed to scale-up in India, it is helpful to understand the challenges. Specific takeaways that should be considered to scale-up these initiatives are as follows:

  1. Ride on an existing mobile money network: Building an agent network from scratch for MFI repayment is a costly and complex proposition, that can yield many benefits (see NBFC-MFIs As Business Correspondents - Who Benefits? (Part-II), but has its fair share of challenges and draw-backs NBFC-MFIs As Business Correspondents - What Will It Take?. On other hand, many MFIs do not want to start as an agent network manager (business correspondent) since this is complicated and removes takes away the key value proposition of de-risking cash handling. For smaller MFIs a better proposition for an MFI and MNO partnership is to ride on existing network (please see BanKO example in the Philippines or Musoni in Kenya).
  2. Choice of an anchor product: A client bears limited economic and opportunity cost since she carries cash to the branch only 2 times in a year. Especially in rural areas, MFI repayments also provide an opportunity for women members to visit the town and many times they do not consider travelling as additional cost. An MNO and MFI partnership has greater probability to succeed if anchor product is chosen carefully after studying the paint points of the consumers.
  3. Building new behaviour takes time: Success in case of technology adoption requires change in customers' existing behaviour. Thus, we should provide adequate time for client to grasp changes in repayment process, adapt to using technology and build capacity to facilitate behaviour change. It is difficult to put a defined timeline for this and it will depend on clients' socio-economic background. A pilot test and subsequent reviews should provide indication as to whether clients are demonstrating the behaviour, or need more nudges in form of product promotion, incentives or new and refined financial literacy (How To Make Financial Education Better.. May Be).

Under the current circumstances in India, where mobile money market is still evolving and agents are widespread only in certain pockets, MFI and MNO partnership could entail huge cost to build the required infrastructure. Thus their partnerships should be built on solid value propositions by putting clients' needs and requirements at the centre. There is no doubt that MFI and MNO will benefit, but at the end clients need to see enough value proposition to shift from existing channel. Mobile money could attract the clients, provided (and only if) it solves a compelling problem for them and MFI-MNO are willing to invest in building clients' capability to use it.

Gravatar: Excerpt from the Doing Business in the East African Community 2012

What has Worked in Credit Information Sharing?

04.05.2015Excerpt from the Doing Business in the East African Community 2012

Specific practices help increase credit coverage and encourage the use of credit information systems. Among the most common measures are 1) expanding the range of information shared, 2) collecting and distributing data from sources other than banks and 3) lowering or eliminating minimum-loan thresholds (figure 7.8).

Reporting positive as well as negative information

Credit information can be broadly divided into 2 categories: negative and positive. Negative information covers defaults and late payments. Positive information includes, for example, on-time loan repayments and the original and outstanding amounts of loans.

A credit information system that reports only negative information penalizes borrowers who default on payments-but it fails to reward diligent borrowers who pay on time. Sharing information on reliable repayment allows customers to establish a positive credit history and improves the ability of lenders to distinguish good borrowers from bad ones. Sharing more than just negative information also ensures that a credit information system will include high-risk borrowers that have accumulated significant debt exposure without yet defaulting on any loans.

Sharing full information makes a difference for lenders. A study in the United States simulated individual credit scores using only negative information and then using both negative and positive information. The negative-only model produced a 3.35% default rate among approved applicants while the use of both positive and negative information led to a 1.9% default rate[16].

A study of Latin American economies suggests that where private credit bureaus distribute both positive and negative information and have 100% participation from banks, lending to the private sector is greater-at least 47.5% greater[17].

Collecting and distributing data from retailers and utility companies

One effective way to expand the range of information distributed by credit registries is to include credit information from retailers and utility companies-such as electricity providers and mobile phone companies. Providing information on the payment of electricity and phone bills can help establish a good credit history for those without previous bank loans or credit cards. This represents an important opportunity for including people without traditional banking relationships. A recent study across 8 global mobile money operators found that 37% of their customers lacked a bank account[18].

But including this information can be challenging. Utilities and retailers are regulated by different institutions than financial companies are. They also might have to be convinced that the benefits of reporting bill payment outweigh the costs.

A utility in the United States has clearly benefited. In August 2006, DTE Energy, an electricity and natural gas company, began full reporting of customer payment data to credit bureaus. DTE customers with no prior credit history-8.1% of the total, according to a recent study-gained either a credit file or a credit score. And customers began to make payments to DTE a priority. Within 6 months, DTE had 80,000 fewer accounts in arrears[19].

A study in Italy looked at the effect of providing a credit bureau with payment information from a water supply company[20]. The credit bureau, CRIF, set up a credit scoring model, the "water score," which took up to 3 years of payment of water bills into consideration. More than 83% of water customers who previously had no credit history now have a positive one thanks to paying their water bills. This has made it easier for them to obtain credit. Those benefiting most include young entrepreneurs and families with only one income-2 of the groups that tend to lack bank accounts in Italy.

Today, credit bureaus or registries include credit information from sources other than banks in 6 economies in the Sub-Saharan Africa region (...). In these 6 economies, coverage of borrowers is 24 percentage points higher than in those where credit bureaus or registries do not include information from retailers or utility companies.

After 1 year of operation, Rwanda's first private credit bureau expanded the range of credit information distributed and included data from 3 non-financial companies. In April 2011, 2 mobile phone companies (MTN and Tigo) and an electricity and gas company (EWSA) started providing credit information to the private credit bureau. The results were rewarding: after just a couple months collecting the data from new sources, the credit bureau's coverage increased by 2%.

Lowering or eliminating minimum loan thresholds

Where the thresholds for loans included in a credit bureau's database are high, retail and small business loans are more likely to be excluded. This can hurt those that could benefit the most from credit information systems-namely, female entrepreneurs and small enterprises, whose loan values are typically lower. Because women make up 76% of all borrowers from microfinance institutions[21], credit bureaus and registries that collect and distribute data on microfinance (typically low value) loans are more likely to support female entrepreneurship. Note that public credit registries usually set relatively high thresholds for loans-$34,260 on average- since their primary purpose is to support bank supervision and the monitoring of systemic risks. Private credit bureaus tend to have lower minimum loan thresholds-$418 on average.

Today, 19 Sub-Saharan African economies (...) have minimum-loan thresholds below 1% of income per capita. Over the past 7 years, 5 economies in the region eliminated their minimum loan threshold (...). Rwanda's public credit registry eliminated its minimum loan threshold to open itself up to more credit information. The minimum loan reported was 500.000 FRW ($1,400) in 2010; now all loans are reported to the registry. Other EAC economies could follow suit.


* If you find value in this Excerpt, you may enjoy reading the full publication, Doing Business in the Eastern African Community 2012

Doing Business in the Eastern African Community 2012.© The International Bank for Reconstruction and Development / World Bank. License: Creative Commons Attribution license (CC BY 3.0 IGO license)



[16] Barron and Staten. 2003

[17] Turner and Varghese. 2007

[18] CGAP and World Bank. 2010

[19] Turner and others. 2009. Turner. 2011

[20] Preliminary findings of an ongoing internal study at the credit information services firm CRIF SpA, Italy.

[21] World Bank. 2010.

Gravatar: Tracy Washington, Frederik van den Bosch and Laure Wessemius-Chibrac

How to grow businesses in fragile and conflict-affected countries

04.05.2015Tracy Washington, Frederik van den Bosch and Laure Wessemius-Chibrac

This post was originally published on the Devex website.

Fragile and conflict-affected countries have become a growing part of the development agenda, not least because of the impact of fragility and conflict on poverty levels, and vice versa. 

More than a billion people live in countries affected by fragility and conflict. The recently released Organization for Economic Cooperation and Development report, "States of Fragility 2015," emphasizes that reducing the poverty in these countries is an urgent priority. The 50 countries on the OECD's fragile states list are home to 43 percent of people living on less than $1.25 per day, potentially reaching 62 percent by 2030. Boosting economic growth and improving livelihoods in these markets is therefore essential. 

But where can jobs and economic opportunities come from? 

The government is a significant employer, but it cannot provide the dramatic job growth that is so badly needed. The private sector must play a role, in particular small and midsize enterprises, which offer the greatest potential for job growth. 

New, growing businesses provide more than just jobs - they offer essential goods and services to local populations, create jobs and give people a stake in peace and stability. But cultivating young businesses - the kind that are poised to grow steadily - is a very difficult proposition in fragile markets. 

To ramp up, or even simply to get started, these firms need "risk capital" - forms of financing, loans or equity that have a higher risk tolerance than bank loans. Risk capital is scarce in countries recovering from conflict or emergency. Even with the necessary financing, business owners still face an uphill battle, managing rapid business growth for the first time, while facing logistical barriers in their operating environments. 

Working toward solutions

The International Finance Corporation's SME Ventures program provides innovative solutions to these challenges. It has recruited new fund managers and invested in four risk capital funds in six fragile states: Bangladesh, the Central African Republic, the Democratic Republic of the Congo, Liberia, Nepal and Sierra Leone. 

Following a venture capital model, these fund managers then select, invest in and monitor new businesses. Eventually, the fund's share is sold, providing a financial return to the fund managers and their investors. 

But IFC's support goes beyond investment. SME Ventures also provides technical assistance to both entrepreneurs and first-time fund managers. The program works with the World Bank Group and local governments to promote regulatory reforms, setting the stage for the funds and their successors. Critical to the program is the financial support of - and knowledge sharing with - investment partners Cordaid and the Netherlands Development Finance Co., or FMO. 

Success in Liberia

One of SME Venture's success stories is logistics firm GLS Liberia. New business owner Peter Malcolm King launched the firm in 2011 with funding and technical support from SME Ventures' West Africa Ventures Fund. 

Today, GLS has grown to become the leading logistics company in Liberia, employing 37 full-time staff. It competes on par with foreign firms, has won the last five competitive tenders in Liberia, and plans to expand further to meet the vast needs for logistics in the country. 

During the peak of the Ebola crisis, for example, GLS handled incoming airfreight and successfully transported medical supplies from the airport, despite long distances and difficult roads. 

6 key ingredients for success

Here are just a few of the ingredients that have helped SME Ventures grow businesses such as GLS Liberia: 

  1. An innovative, nimble model. The program invests not in entrepreneurs directly, but in fund managers who have a vested interest in carefully selecting and supporting the investee companies. While this model is not new, it is an unusual approach in fragile contexts, and IFC took the lead in recruiting the fund managers. 
  2. Focus on 'stars'. In contrast to larger-scale programs, SME Ventures finances one to two dozen firms per fund. These firms stand out from the pack, showing growth that outpaces other local SMEs. Dedicating attention to firms with the most potential requires time and flexibility, but offers tremendous rewards. 
  3. Combine financing and technical assistance. IFC, as part of the World Bank Group, offers wide-ranging support to new businesses: risk capital through a fund, technical and business support for the firm owners, and startup assistance to the fund managers, who in most cases are first-timers, learning to achieve global standards. IFC also works with local governments to introduce regulation that permits the fund's structure, which is often novel in these markets. 
  4. Create strong partnerships. Cordaid co-invested with IFC in WAVF while at the height of the Ebola crisis in 2014, and FMO invested in the Central Africa SME Fund from its inception in 2010. Not only did these investments strengthen the funds, but Cordaid also provided expertise gained from working with grant-funded resilient business development services for entrepreneurs in crisis situations, and results-based financing of public services in fragile countries. Their knowledge led to a solution during the Ebola crisis: zero-interest working capital loans to firms in Ebola-stricken countries to keep companies going during the crisis. 
  5. Implement peer learning and knowledge sharing. FMO hosted SME Ventures' annual knowledge sharing event in both 2014 and 2015, where fund managers were able to learn from others. IFC, Cordaid and FMO shared lessons in working with other funds in different markets. Such events enhance the performance of fund managers, and in turn benefit the investee firms. 
  6. Be patient. Startup firms require time to show their full potential, especially in fragile and post-conflict environments. SME Ventures' ability to take the long-term view is now bearing fruit, with follow-on funds planned and some exits expected in the near future.

The SME Ventures program does not only benefit the selected entrepreneurs, their fund managers or the investment partners. It also demonstrates to financiers globally that these markets contain growth potential, in turn multiplying the investment flows toward growing businesses in fragile and post-conflict countries. 

By pioneering this model, IFC and its partners FMO and Cordaid aim to transform the world's toughest markets.


Tracy Washington is the program manager of IFC's SME Ventures program. Frederik van den Bosch is the manager of MASSIF, Blending and CD at the Netherlands Development Bank FMO. 
Laure Wessemius-Cgibrac joined Cordaid as head of investment in June 2013.


What do renowned economists, financial sector practitioners, academics, and activists think about current issues of financial sector development in Africa? Find out on the blog - and share your point of view with us!


The Digital World and a Human Economy: Mobile Money and...Sean Maliehe & John Sharp, Research Fellows, University of Pretoria
DFS Customer Development Opportunities in NigeriaJacqueline Jumah, Senior Analyst, MicroSave & Irene Wagaki, DFS Consultant
Financial Education: The Key to the Development of African...Emmanuel Zamblé, Expert-Consultant in Capital Markets