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Microfinance in fragile states

Microfinance in fragile states. November 30th 2010. The perspective of AFD. AFD and fragile states 2. Is microfinance viable in fragile states? 3. What type of support for microfinance in fragile states?. AFD and fragile states. AFD and fragile states. 1.1.

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Microfinance in fragile states

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  1. Microfinance in fragile states November 30th 2010 The perspective of AFD

  2. AFD and fragile states2. Is microfinance viable in fragile states?3. What type of support for microfinance in fragile states? Microfinance in fragile states

  3. AFD and fragile states Microfinance in fragile states

  4. AFD and fragile states 1.1 • AFD conducted in 2009 a study on the performance and lessons to be drawn from microfinance projects conducted in fragile states • Countries: • Word Bank Low Income Countries Under Stress (LICUS) list as of 2007 • Palestine, Niger, Madagascar and Kenya added • Main features of fragile states : • Weak state policies and institutions • Very weak socio-economic indicators: GDP/hab, child mortality, life expectancy (< 30 years), access to basic services • High prevalence of conflict and political instability (1/3 of countries) Microfinance in fragile states

  5. Country Start End Total €M Afghanistan 2006 2006 3.8 Cambodia 1993 2007 16.3 Comoros 1993 2008 8.5 Congo 2006 2006 1.5 Guinea 1987 2006 21.6 Haiti 2003 2008 3.6 Mauritania 1996 2008 2.9 Niger 1992 2001 5.4 Togo 1994 2004 5.5 Kenya 2003 2004 16.0 Madagascar 1994 2008 19.4 Palestine 2008 2008 1.0 DRC 2008 2008 2.0 107.5 Total AFD and fragile states 1.1 • Historical presence in microfinance in fragile states since 1988 • Microfinance commitments in fragile states between 1987 and 2008 amounting to 107 M EUR, 32% of total microfinance commitments Microfinance in fragile states

  6. 2. Is microfinance viable in fragile states? Microfinance in fragile states

  7. Is microfinance viable in fragile states? 1.1 • Microfinance offers attractive prospects in fragile states: • Most people are unbanked • Large size of the informal economy • Significant role in job creation in the face of high unemployment (young workers, displaced persons, demobilised soldiers) • Mature sector, tested methodologies, standardized indicators: easy to replicate • Direct private sector support / avoidance of excessive red tape and corruption • Yet, microfinance faces specific challenges: • Weak supervisory and regulatory authorities • Weak relations between MFIs and an often failing banking sector • Need to manage arrears as a result of external shocks • Risk of over-investment by funders because of limited absorption capacity • Risk of complete loss of interest if international sanctions are imposed • Few mature MFIs sought after by funders / many unprofessional MFIs overlooked Microfinance in fragile states

  8. Is microfinance viable in fragile states? 1.1 • Experience indicates resilience of MFIs to crisis and fragile environments • MFIs gain market shares from banks in cases of crisis (Comoros, Madagascar) • Resilience of MFIs to global financial crisis of 2008/2009 • Quick recovery from external shocks: • Growth of Madagascar MFIs after the political crisis of 2008 • Resilience of credit unions in Congo-Brazzaville despite civil war (1997 -1999) • Resilience factors • Relative isolation from formal economy • Short-term credit • Capacity of institutions to adapt • Diversification of sectors financed • Proximity/knowledge of clients • Rigorous portfolio management (often better than banks) • Desire of clients, members and employees to maintain the MFI alive Microfinance in fragile states

  9. 3. What type of support for microfinance in fragile states? Microfinance in fragile states

  10. What type of support for microfinance in fragile states? 1.1 • Main lessons from a donor perspective • Microfinance in extreme situations is not a priority (conflict, reconstruction) • MFIs can reach financial and institutional self-sufficiency if supported for a long time (> 10 years) • Need to closely monitor changes in an evolving environment • Need to control growth and over indebtedness • Focus on capacity building and internal controls • Need to adapt financing tools to growth: from start-up grants, to soft lending, market rate lending, guarantees and equity • Donor roles beyond distribution of resources • Facilitator between MFIs and other parties (CRG Guinea, CECAM Madagascar) • Technical partner (liquidation of CMG Guinea) • Promoter of good practices (MIS, audit, AML) Microfinance in fragile states

  11. What type of support for microfinance in fragile states? 1.1 • Interventions at the sector level • Support to the macro level: development of appropriate regulatory framework and supervision capacities (DRC, Haiti) • Support to the meso level: credit bureaus (Comoros), guarantee schemes (ARIZ), professional associations, training centers • However, sector level interventions must be cautious about: • Flexibility/adaptation of legal framework can favor experimentation at initial stages • Long term self-sufficiency of professional associations • Financial dependence of service providers (training centers, auditors) • Emergence of market distortions: excessive soft lending, systematic guarantees • NTIC hype Microfinance in fragile states

  12. Thanks! Philippe Serres - serresp@afd.fr

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