CAPITAL FLOWS AND DEVELOPMENT OF AFRICAN ECONOMIES: TOWARDS AN ACTION PLAN FOR FINANCING INVESTMENT

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CAPITAL FLOWS AND DEVELOPMENT OF AFRICAN
ECONOMIES TOWARDS AN ACTION PLAN FOR FINANCING
INVESTMENT IN AFRICA MEETING ZANZIBAR 24-25
APRIL 2007
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ACCELERATING MICROFINANCE AND DOMESTIC SAVINGS IN
AFRICA

• PRESENTED BY
• MR.FUDZAI PAMACHECHE
• HEAD OF DIVISION PRIVATE SECTOR DEVELOPMENT,
  INVESTMENT RESOURCE MOBILIZATION DIVISION
• COMMISSION OF THE AFRICAN UNION

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AREAS TO BE COVERED IN THE PRESENTATION

• Introduction
• Role of Micro finance in Investment
• MF Role in Savings Mobilization
• Challenges facing Micro finance in Africa
• Accelerating MF for Investment and Savings
  Recommendations
• Way Forward

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Introduction

• Financing for development limited to large
  financial institutions and big companies.
• Financial sector reform have concentrated on
  creating favorable conditions for large
  investors.
• Micro-credit or micro-finance treated as residual.

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• Introduction
• Poverty within Sub-Saharan Africa is
  multi-dimensional, complex in nature scope.
• Most poor people have no access to deposit their
  savings and other financial services.
• Micro finance is a development tool, and can
  contribute in alleviating poverty.
• SMME development through MF has a part to play in
  the effort towards poverty reduction.

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Introduction

• Poverty in Africa has taken a new dimension in
  that it affects urban and rural dwellers.
• 70 of the continents 900 million population
  live in the rural areas where the majority are
  poor.
• Most of the financial services are found within
  the urban and peri-urban areas.

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Introduction

• Only 5 of all 630 million Africans living in
  rural areas have access to any form of financial
  service.
• MF has proved in many instances that it can
  regenerate economic activity and address poverty.
• In Europe over 23 million people are employed in
  SMMEs and access to finance has been the key to
  this development.

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Role of Micro finance in Investment

• Africa recognizes the increasing importance of
  the role played by micro-finance initiatives as a
  source of valuable investment.
• Financial sector reforms have been undertaken
  including capital markets development which are
  a source of investment capital but little has
  been done on MF development. Even the venture
  capital companies, unit trusts and trust funds in
  most cases assist well to do clients.

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Role of Micro finance in Investment

• Investments through MF are making inroads in
  advancing productive capacities, employment
  creation and in increasing the incomes of the
  poor.
• MF has the ability to economically empower
  vulnerable groups such as women by increasing
  their contribution to household income.
• MF institutions can help clients not only
  accumulate assets but also save through
  productive investments.

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Role of Micro finance in Investment

• MF helps create opportunities for self-employment
  by making available capital for enterprising poor
  men and women.
• Increases welfare including school attendance,
  nutrition and health.
• Opens opportunities for adoption of new
  technologies and new production relations.

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MF Role in Savings Mobilization

• MF infrastructure increases the scope for
  mobilizing domestic savings even in rural areas
  which can be done in various ways including
• Savings clubs
• Mobile savings banks
• Formal Micro finance institutions such as post
  office savings banks building societies
  cooperative societies
• Informal savings groups, money lenders.

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MF Role in Savings Mobilization

• Availability of MF institutions (MFI) in remote
  areas offers the opportunity to save in good
  times and borrow in hard times especially for
  womens clubs, young farmers clubs and other
  production oriented groups find it easier to save
  with the MFI that are closer to their places of
  operation and or residence.

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Challenges facing Micro finance in Africa

• Most African countries have not legalized
  micro-finance as a bona fide financial services
  sector.
• Need for appropriate security laws that assure
  the poor that their hard earned savings are safe
  and they can access them.
• Risk perceptions still manifest themselves in
  many vulnerable groups hence would rather keep
  their money under their pillows.

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Challenges facing Micro finance in Africa

• Weak legal creditor and borrower protection MFIs
  tend to be exposed as a result of weaknesses in
  the legal framework. The effects of this are felt
  in situations of default by borrowers and
  collapse of MFI.
• Ineffective enforcement of laws Even where
  appropriate laws are put in place, enforcement is
  usually a problem due to capacity and resource
  constraints.

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Challenges facing Micro finance in Africa

• Lack of usable collateral The poor usually do
  not have any valuable assets to tender as
  collateral to lending institutions. As a result,
  they find it difficult to access loans.
• Weak prudential oversight over saving
  institutions Bodies set up to supervise and
  regulate financial institutions are generally
  weak due mainly to lack of human capacity and
  resource constraints.

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Challenges facing Micro finance in Africa

• Limited capital and funding sources coupled with
  expensive commercial funds and narrowing profit
  margins for MFIs.
• High Competition for clientele leading to
  multiple borrowings.
• Limited outreach among the MFIs due to lack of
  interconnectivity infrastructure.

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Challenges facing Micro finance in Africa

• Lack of information technological solutions.
• Inadequate capacity to assess and manage risk,
  including HIV/AIDS clients.
• High illiteracy levels, low level of business
  development management skills.
• Inappropriate design of MF loan products.
• Demolition of businesses by local authorities.
• Small size loans related high costs of
  transactions.

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Accelerating MF for Investment and Savings
Recommendations

• Governments should                  
• Deepen and integrate the financial sector its
  systems, services and infrastructure.
• Review the existing legal and regulatory
  framework to mainstream microfinance into the
  countries financial system.
• Provide incentives for MFIs willing to work for
  the poor ie provide funding for on lending and/
  or guarantees for to support SMMEs specifically
  targeted dynamic sectors the make an impact on
  poverty eg agriculture.

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Accelerating MF for Investment and Savings
Recommendations

• Governments should build institutional capacity
  for supervision and monitoring and enforcement of
  microfinance regulations and general business
  related laws.
• Governments should also invest in rural
  infrastructure such as information communication
  technology, energy and transport which would
  attract MFIs to locate and provide financial
  services to these remote areas.

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Accelerating MF for Investment and Savings
Recommendations

• To meeting the clients needs, MFIs should develop
  and match the products and delivery methodologies
  to the diverse needs of different clients.
• MFIs should enhance networking development of
  strategic alliances and information sharing and
  transparency.
• The bigger MFIs to support and build the capacity
  of the young upcoming ones.

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Accelerating MF for Investment and Savings
Recommendations

• MFIs should broaden the range of their products,
  services and delivery systems to a more open
  market instead of restricting services to members
  only.
• Embrace and adapt new information technologies in
  order to remain competitive in the market place
  and to reduce transaction costs.

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Accelerating MF for Investment and Savings
Recommendations

• AU/ECA/AfDB should
• Fully integrate microfinance in their programmes
  including the NEPAD.
• Review the policies, strategies and legal
  frameworks of member countries with a view to
  harmonization in collaboration with RECs.

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Accelerating MF for Investment and Savings
Recommendations

• Encourage the adoption of best practice in micro
  finance services and systems by member countries
  of the AU.
• Work towards the development and integration of
  microfinance infrastructure in Africa.
• Carry out an assessment of the 2005 as a Year for
  microcredit as declared by the UN. What measures
  were taken and what are the outcomes?

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Conclusion

• In my village we believe that a poor person does
  need handouts, charity or pity but needs an
  opportunity to express ones self esteem by being
  productive and self sustaining. The idea is that
  you should provide the means for one to be
  productive and access to markets for selling the
  output.
• Availability and access to microfinance can
  change the poors fortunes by opening up new
  opportunities that engage them into economic
  activity.

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Conclusion

• The AUC is commissioning a study to look at the
  legal framework and ways of improving the
  operations and services of microfinance in Africa
  with a view to come up with some recommendations
  on either drawing up a model legal framework
  which countries which currently do not have a
  framework could adapt to their situation and
  specificities.

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Conclusion

• The results of the study will be shared with all
  stakeholders to ensure that optimum contributions
  are made.
• The key issue is how three African Institutions
  can work together and promote the role and
  effectiveness on microfinance in Africa as an
  important tool for attacking poverty and for
  moving towards the achievement of MDGs.

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• THANK YOU FOR YOUR ATTENTION