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Financial Inclusion in Africa: What Role for Microfinance*

Mar 21, 2016
Financial inclusion is important for economic growth because it plays a dual role. While creating access especially to operators in the informal sector, it will enhance financial deepening thus embracing both breadth and depth dimensions of financial development. In other words, financial inclusion to be relevant for economic development must focus on the core elements of financial intermediation such as savings mobilization and asset transformation, risk mitigation and enhancing efficiency in the corporate sector by monitoring management and exerting corporate control. Polices of financial inclusion that rely mainly on transactions rather than the whole gamut of intermediation while creating access may not translate into usage broadly defined to include credit and may not necessarily lead to financial deepening and hence economic growth. Among different strategies for increasing access to finance in Africa, microfinance stands out as a mechanism with strong potential for reducing poverty and inequality and promoting entrepreneurial finance. Microfinance Institutions are critical providers of finance to small and micro enterprises that are unable to raise credit from commercial lenders due to information asymmetry and the high costs associated with lending. Micro, small and medium scale enterprises are the biggest job-creators and contributors to economic growth in many developing countries; and finding alternative ways to finance them has placed microfinance in the epicentre of the financial inclusion debate (Robinson, 2001). With the general trend in microfinance, which places emphasis on financial sustainability, MFIs can fully recover costs and make profits. Such commercially oriented microfinance should finance their loan portfolios through savings mobilization, commercial debt, and retained earnings; and charge interest rates that will enable cost recovery from income generated "from the outstanding loan portfolio, and to reduce these costs as much as possible" (Meesters, Lensink & Hermes, 2008:2); and "generate a profit" (Robinson, 2001). Literature supports the view that sustainable microfinance will have outreach and impact, hence the push towards sustainable, commercially oriented MFIs (Conning, 1999:51; Cull & Morduch, 2007:F107; Manos & Yaron, 2009:101; Robinson, 2001). Quayes (2012:3432) takes this argument further by concluding, "attainment of financial sustainability is not an impediment to outreach efforts, and may actually facilitate greater depth of outreach". When MFIs that leverage on deposits are regulated, they are generally sustainable and expand outreach (Bayai and Ikhide, 2015, Haiyambo and Ikhide 2015). An enabling regulatory environment not only makes MFIs sustainable but also enables them to grow. In the African context specifically, microfinance presents a viable opportunity to drive financial inclusion for the unbanked and underserved, as most African financial systems are still nascent and incapable of addressing the more pressing challenges of rural poverty and unemployment. Microfinance broadly defined to include microloans, microsavings, microinsurance and remittances/money transfers should receive policy focus. Microfinance, so defined, has been proven to improve access and enables the poor to manage and build their asset base gradually. Formal microfinance in Africa has increased during the last two decades through the expansion of the scope of formal institutions (downscaling, linkage programs), emergence of new formal institutions focused on microfinance, reforms of state-owned financial institutions and the introduction of new microfinance programs through governments. However the formal operations concentrate mostly on providing credit facilities. Savings mobilization has yet to receive adequate attention. Government sponsored microloans programmes are very common in many SSA countries because of the political attractions that such schemes hold more for vote catching in elections and less for poverty reduction. Microfinance programmes that target enterprise finance rather than consumption have better chances of reducing poverty through boosting employment. This is also why the present preoccupation with mobile phone banking in many parts of Africa must now begin to migrate to the next phase involving credit creation rather than the obsession with money transfers. Many mobile money users are not otherwise included in the formal financial system-in Kenya 43% of adults who report having used mobile money in the past 12 months (2012) do not have a formal account; in Sudan 92% do not (AfDB, 2013). In the same breadth, the present preoccupation with microloans in many SSA economies might be misplaced.
Microloans do not make microentrepreneurs. Microfinance institutions have emerged in Africa largely to meet the unfulfilled financing needs of the self-employed and of micro, small and medium scale enterprises. For such endeavours to develop, fledgling entrepreneurs must have long-term access to capital. In most of the surveys on this sector, access to finance and energy feature prominently on the list of MSME's needs. MFIs have been able to fill this demand because they focus their loan analysis on clients' character, cash flow, and commitment to repay the proposed loan, rather than on collateral or business experience. In this way, MFIs take into account the special characteristics of the new private sector in this region. What this calls for is a well-articulated microfinance strategic framework in these economies to complement overall financial sector development. *Excerpt from Inaugural lecture on "The Finance and Growth Debate in Africa: What Role for Financial Inclusion" University of Stellenbosch, Stellenbosch South Africa, November 2015. _________________________________________________________________
About the Author Sylvanus Ihenyen Ikhide is Professor of Development Finance and Head of the Doctoral programme in Develoment Finance at the University of Stellenbosch Business School, Cape Town, South Africa.

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