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Micro-Credit Financing and Poverty Alleviation in OIC Challenges Facing the Microfinance Sector in Developing Countries

Micro-Credit Financing and Poverty Alleviation in OIC Challenges Facing the Microfinance Sector in Developing Countries. Definition and key principles Situation in Africa Key Constraints and Challenges Key Opportunities Key interventions of UNCDF in Building Inclusive Financial Sector.

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Micro-Credit Financing and Poverty Alleviation in OIC Challenges Facing the Microfinance Sector in Developing Countries

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  1. Micro-Credit Financing and Poverty Alleviation in OIC Challenges Facing the Microfinance Sector in Developing Countries

  2. Definition and key principles Situation in Africa Key Constraints and Challenges Key Opportunities Key interventions of UNCDF in Building Inclusive Financial Sector Contents

  3. Microfinance: provision of diverse services (credit, savings, microinsurance, remittances, leasing…) to lower –income and poor people (level of poverty will vary from one country to another) by diverse professional financial intermediaries (NGOs, Banks, NBFI, Credit Unions…) DEFINITION

  4. Poor people need a variety of financial services not just loans; Microfinance is a powerful tool to fight poverty; Microfinance means building financial systems that serve the poor; Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor people Key principles by CGAP

  5. Microfinance is about building permanent local financial institutions; Microcredit is not always the answer. Microcredit is not the best tool for everyone or every situation; Interest rate ceilings hurt poor people by making it harder for them to get credit; Key principles by CGAP (contn’d)

  6. The role of government is to enable financial services not to provide them directly; Donor funds complete private capital not compete with it; The key bottleneck is the shortage of strong institutions and managers; Microfinance works best when it measures –and discloses –its performance. Key principles by CGAP (contn’d)

  7. More than 50% of Africans (approximately 300 million people) live in extreme poverty. Only 4% of the total population in Africa has a bank account. Number of bank deposits per person in Africa is far below other regions. Situation in Africa Number of Deposits per 1,000 population Madagascar Venezuela Thailand Greece Austria Source: Demirguc-Kunt, Asli, World Bank, 2005.

  8. Only 1% of Africans have a loan or credit facility with a formal financing institution. Number of loans per person in Africa is far below other regions. Situation in Africa Continued… Number of Loans per 1,000 population Madagascar Venezuela Panama Greece Austria Source: Demirguc-Kunt, Asli, World Bank, 2005.

  9. Minimum deposits and fees required to open checking accounts in Africa, in relation to GDP per capita, are significantly higher than other regions. Situation in Africa Continued… Minimum Amount to Open Checking Accounts (%of GDP per capita) Uganda Malawi Ghana Bolivia Bulgaria Source: Demirguc-Kunt, Asli, World Bank, 2005.

  10. Starting a business in Africa is far more expensive and takes longer than in most other regions. Situation in Africa Continued… Starting a business regional comparison Source: Doing Business: Benchmarking Business Regulations. World Bank/ IFC: 2005

  11. Registering property is considerably more expensive than in other regions. Situation in Africa Continued… Cost to register property (% of average value of property to be registered) Source: Doing Business: Benchmarking Business Regulations. World Bank/ IFC: 2005

  12. Enforcing contracts in sub-Saharan Africa is difficult and expensive. Micro and small enterprises in Africa generally lack access to credit or any type of financial services. Women and the poorest people often have no access to financial services in Africa, particularly in rural areas. Situation in Africa Continued… Contract enforcement in regional comparison

  13. Financial sectors in most African countries are “under-capitalized, underdeveloped, and in need of restructuring.”1 African financial sector depth (M2/GDP) is limited: Financial sector depth measures the liquidity of an economy. Average depth in Africa was 32% between 1995 and 2000.2 But individual LDCs have far less depth: e.g. DRC: 7%; Guinea: 10% Situation in Africa Continued… 1. Office of Finance, US Department of Commerce, International Trade Administration. 2. Christensen, Jakob, Domestic Debt Markets in sub-Saharan Africa (IMF Staff Papers, Vol 52, No 3) Washington, D.C. : 2005. 3. CGAP, UNCDF studies.

  14. Informal sector remains dominant in much of sub-Saharan Africa, although MFIs are growing.3 Financial services infrastructure in Africa lags progress in other parts of the developed world. Policy, Regulatory and Supervisory Frameworks need considerable strengthening in many African countries. Situation in Africa Continued…

  15. Access to domestic and international capital markets for governments and financial service providers is very limited. 17 of the bottom 20 countries on the Capital Access Index are in Africa. Situation in Africa Average of Sub-components for 2005 Capital Access Index by Region

  16. The review of different sector evaluations and Microfinance National Strategies in Mali, Niger, Benin, Togo, Madagascar, Democratic Republic of Congo, Malawi, Sierra Leone…, particularly shows, but with differences related to the development stage of the given sector, that the constraints concern three major axes: environment, particularly with the legal and regulatory framework; financial intermediaries; borrowers. Key Constraints and Challenges

  17. Diversity of political situations and Governance quality impacting the economic and social situation and the MFIs: Legal situation and difficulty to enforce the laws Infrastructure, communication and technology problems increase the transaction costs both for borrowers and lenders; Macro –economic instability (high inflation); Not a common shared vision on the sector development; Wide country (DRC); low density of population (Mauritania, Niger) Key Constraints and Challenges Continued…

  18. Loose of confidence due to the collapse of former MFIs (DRC, Guinea…); Concentration in Urban areas; Rural areas not sufficiently covered; Agriculture and rural activities important for African development; Disperse populations and remote rural areas; Transaction costs; Doubtful debts and loan portfolio quality; Pricing (interest rate…) and profit –center; Business Planning; HRs capability and motivation; Key Constraints and Challenges Continued…

  19. Lack of common Vision; Leadership, governance and management problems mainly in the C.U. (relationships between the «technicians»and «the elected bodies»); Growth management; Deficiency in the internal control system and procedures; Management Information System problem; New products: insufficiency in innovative products despite some progress; Key Constraints and Challenges Continued…

  20. financial transparency and institutional, social and financial viability; Insufficiencies sometimes accentuated by the weakness or the absence of support services to the sector, at financial and technical levels (training, accounting and audit assistance, credit bureaus, appropriate financing mechanisms). Financial continuum: relationships with the banks are increasing yet not a right level; Banks still lack of competency to assess the risk related to MFIs for refinancing and to a broader range of clientele (direct funding) Sustainable Financial services in rural still a problem; Long term resources to sustain mid –term loans Access to financial resources: less an issue if strong MFIs to invest in. Key Constraints and Challenges Continued…

  21. HIV / AIDS and its impact; Low level of productivity; High illiteracy rate; Psychological and social aspects; Necessity of having trained clientele with increasing and credible cost-effective investment opportunities, transaction needs, transfer, savings… Key Constraints and Challenges Continued…

  22. The Millennium Development Goals (MDGs) : reduce extreme poverty and hunger; ensure primary education for all; promote gender equity and women independence; reduce infant mortality; improve maternal health; fight HIV/AIDS, malaria and other diseases; ensure a viable environment; increase development global partnership. Key Opportunities

  23. Political willingness to support the sector (PRSPs, MDGS); Development of the informal sector and the MSMEs and increasing market for MF; Increasing interest of a common shared vision for a sustainable microfinance sector (donors, investors, practitioners, TSPs, Banking systems); Microfinance provides financial services to the huge market considered as playing key role in development and poverty reduction Mobilization of local savings and remittances; Contribution to the integration of the local financial markets Key Opportunities

  24. New players in the sector (banks, corporate finance companies…); Development and use of tools to design BP and new products (MicroSave, CIF, AFCAP…): Credit Savings and Education, learning from the informal sectors, strengthening local initiatives (MMD (Niger), FSAs(Benin, Ghana, Kenya…); Innovation to tackle some constraints (mobile banking, Smart cards with fingerprint, use of photos, networking with banks and postal banks for money transfer, Credit bureaus…) Regional program to support the sector with donors (BCEAO, UNCDF/UNDP «Building Inclusive financial sectors», Lot of funds available for Africa (>200 millions USD); Regional initiatives to rationalize use and chanel of funds. Key Opportunities

  25. Diverse institutions providing permanent access to a wide –range of financial services for a broad range of poor and low –income households and MSEs; sustainable access to financial services to a majority of lower –income and poor people by the integration of microfinance to the mainstream financial sector Bank downscaling; MFIs upscaling Key Opportunities

  26. Identify the constraints and untapped opportunities that need to be addressed to allow for full participation of the lower segments of the market into the financial sector; Support development of national policies, strategies and action plans based on sector assessment; Help build a shared vision on shaping a competitive, efficient, and inclusive financial sector; Assist set up of appropriate frameworks for donor coordination and cooperation (trust funds, investment committee, etc.); Increase focus on developing: 1) a conducive political, economical environment; 2) a conducive legal and regulatory framework; Key interventions of UNCDF in Building Inclusive Finance

  27. Microfinance is not a panacea and all poor people are not eligible to microfinance; Donors should set up appropriate frameworks to increase coordination at national and regional level; Government should pull out from direct intervention and rather support national dialogue and shared vision to promote an Inclusive Financial Sector that work for the country and the poor majority Conclusion

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