Africa is a contradiction. It has so many assets, including vast riches in natural resources and some of the most exquisite scenery on Earth. Most Africans are extremely friendly, community-minded, and very hard-working people. At the same time it is a sad continent, home to hundreds of millions of people for whom survival is a daily struggle. The United Nations Human Development Index ranks 177 nations annually according to health, literacy, and income. This year, African nations occupy all of the lowest 24 places on the list. This group represents half of the countries on the continent. Arguably, Africa is the poorest region of the world.
Without doubt, it is time to maximize the abundant resources of Africa, especially the human assets. Microfinance is an excellent tool to achieve this goal. A close look at the realities of Africa reveals factors which must be taken into consideration as part of any effort in development. Economic patterns here are different from other parts of the world. First, few people have wage-paying jobs. Self-employment dominates the labor force. Also, people are more dispersed than in most other parts of the world. In a situation where the population is geographically scattered and self-employment is the norm, microfinance is a proven, practical way to boost personal income. Large public works projects or signs of industrial development are rare. Foreign direct investment and job creation in any form should be encouraged wherever possible, but no one is suggesting that these will produce large scale employment for Africans anytime soon.
The Importance of Finance in Africa
From my observations while working in economic development across the continent, a speedy and cost-efficient way to stimulate economic activity among Africans is to bolster the kinds of income-generating activities they already practice. If an individual is selling retail goods, as many are, it is most helpful to make certain he or she has an adequate inventory and a large enough variety of products to meet his or her customers’ demands. For those involved in animal husbandry or agriculture, it is most helpful to assure them that they have enough financing to weather seasonal fluctuations in income. Basic finance of this kind is currently in very short supply. Though most Africans deal with small sums of money regularly, they may never come into contact with a bank throughout their entire lifetimes. Complete lack of access to financial services for so many people stunts development, which is why few people who live in cash-only economies ever progress beyond bare subsistence. Most of these people are extremely vulnerable and cannot maximize the value of the few resources they have.
The fact that a majority of Africans have absolutely no access to financial services is difficult for most Westerners to imagine. Too often, business people, researchers, foreign aid officials, and even NGO workers congregate in the capital cities and urban business centers. These are typically the most advanced and prosperous places in a given country. Yet they are not representative of the lifestyle or quality of life for most people, because the majority of Africans live in rural settings. Even in the more developed countries, such as South Africa and Nigeria, half of the population lives in small villages or on subsistence farms. The figure soars to 70 percent in Kenya and 94 percent in Rwanda. I recall walking through an open-air market in western Uganda, which was their equivalent of a megamall. Individual shops were pieces of cloth on the ground with wares spread out on top, dirt aisles permitted buyers to walk around and inspect the merchandise, and the products were divided into sections. However, the similarities ended there. They had no cash registers, no electricity, no parking lots – hardly anyone had a car. Yet this was unmistakably the business hub of the community.
By focusing on these kinds of markets and the people working there, development strategies can produce significant progress. The centerpiece of economic development for most Africans should be provision of entry-level financial services because such services will improve incomes for the greatest number of people. One of the biggest barriers to improved lives for those people I saw in Western Uganda was lack of access to even the most elementary financial services, whether a US$50 loan to increase inventory or a secure way to save their meager profits.
While I was CEO of Opportunity International in the early 1990s, we initiated microfinance programs in Africa and found massive unmet demand for loans to grow tiny personal businesses. Opportunity International continues to expand its financial services in Africa to this day. In some places, they are periodically driving in automatic teller machines on trucks so people can have their first reliable means to save money and manage transactions. One of the main lessons learned in recent years is that eagerness for savings services is even greater among Africans than their strong appetite for small loans. Dennis Ripley, Opportunity’s Senior Vice President for Programs, says, “We have found an incredible demand for savings accounts among the poor. We opened the Opportunity International bank of Malawi four years ago and now have 123,000 savings accounts and 15,000 loans.”
The demand is understandable. Without financial services, prosperity is thwarted if not impossible. This principle is true for everyone. Trying to imagine the impact on standard of living with no savings accounts, no credit in any form, and no insurance. Traditional measurements of personal wealth – such as homes, automobiles, and education – would be vastly more scarce, not to mention more susceptible to severe damage from health problems or other adversities. Financial services are so common in the West that it is easy to take them for granted. They are not widely available in Africa and the negative consequences are pervasive.
Many types of interventions can help poor people improve their lives. Good nutrition, clean water, education, and ethical government are all extremely valuable. The benefits of those will be severely diminished, however, if financial services are not also available. Working capital, even in very small amounts, is essential for wealth creation. Progress does not go far in a purely cash economy. The fact is that more than half of the world’s population lacks access to banking. In Africa, that percentage is much higher. One study found that 65 percent of Africans had no financial services. I have visited many communities where the figure was 100 percent. In 2003, a division of the United Nations conducted an extensive study of banking in Africa. The United Nations Environment Program Finance Initiative (UNEPFI) recognized Nigeria as having one of the continent’s largest banking sectors, at a time when it totaled only 90 banks in a country of more than 100 million citizens, and the most populous country on the continent. The harsh reality was that only the most elite in society could use financial services. The UNEPFI study concluded, “Access to financial services for the underprivileged is a prerequisite to addressing the social imbalances and problems associated with many African communities.”
The government of Nigeria apparently agrees with that assessment and is taking steps to assure that financial services extend to the masses. President Alhaji Musa Yar’Adua regards this as essential for reducing the rate of poverty in his country. One practical step recently taken finds the Central Bank of Nigeria (CBN) embracing microlending programs and bringing them into the official banking system. By early 2008, CBN licensed 716 microfinance banks throughout the country. While their combined deposits are tiny compared to commercial banks, the microfinance institutions are reaching a completely different segment of the population and show the greatest potential for moving poor families above the poverty line.
The situation is the same all across Africa. The Democratic Republic of Congo (DRC) is home for 65 million people, yet there are only 70,000 bank accounts in the entire nation. That means roughly only one out of every 1,000 individuals has access to reliable savings or credit. It is no wonder that an average person finds it so difficult to rise from poverty. In 2004 I was in Kinshasa evaluating potential grantees for clean water and HIV/AIDS projects and also advising Hope International as it started a new program for microloans in the DRC. That fall, it became the first legally registered microcredit program in the country. It is notable that, in spite of Congo’s massive size and natural resources, microfinance is such a recent development. Hope International’s microfinance program in Congo continues to be one of the country’s largest, adding about 1,000 new participants each month.
Microfinance as an Alternative
Traditional thinking about economics puts little value on self-employment. Yet in Africa, earning a living in the informal economy is how most people survive. The Economist reported that 67 percent of non-agricultural employment in Africa is in the informal sector. Progress will come for Africa as financial services including credit, insurance, and reliable transaction mechanisms enable ordinary people to improve their livelihoods.
Late last year I advised journalist Matthew Swibel as he compiled the first-ever Forbes list of the world’s “50 Top Microfinance Institutions.” None of the institutions he cited as leaders was in sub-Saharan Africa. Giant securities firm Morgan Stanley recently formed a new Microfinance Institutions Group (MFIG) which is packaging and selling collateralized loan obligations (CLOs) for microcredit. Only about 5 percent of microfinance institutions worldwide meet Morgan Stanley’s strict investment criteria. All but two of their investments so far have been outside of Africa. Shawn Murphy of Morgan Stanley explained, “Africa has been a less developed market from a microfinance perspective.” Currency fluctuation risk and the greater dispersion of population are among factors holding back growth of microfinance in Africa.
But serious moves toward microfinance expansion are underway. AfriCap Microfinance Fund, based in Johannesburg, is a private equity fund dedicated to the microfinance industry. It closed a second round of investments last October adding US$50 million in capital. As Juliette Rose of Morgan Stanley puts it, “The landscape is changing very rapidly in Africa.” Africa’s special challenges are driving innovation. Dispersed population led to cell phone banking at Wizzit Bank in South Africa, where transactions are conducted using a secure form of text messaging. For new customers, the bank specifically targets people who have never had bank accounts, but do own cell phones. Sales agents are formerly unemployed and disadvantaged youth called WIZZkids working under a franchise model to set up the new accounts. The idea is catching on. More than half a million South Africans now use their cell phones to pay for goods and send money to relatives.
Most success stories of microfinance raising the poor from poverty generally come from Bangladesh, India, the Philippines, or parts of Latin America. Until now, Africa has lagged behind the rest of the world in microfinance growth, but that is changing. Thousands of programs are already operating effectively on the continent, although many are young and most are relatively small compared to those elsewhere.
Financial services at a micro level are only now coming of age in Africa. As this occurs, expect to see meaningful progress on poverty in Africa.