European Microfinance Week 2017

PRESENTATIONS

Soulémane DJOBO opened this session, stating that microfinance and financial inclusion have taken a great leap forward, but that the sector still has a gap between supply and demand. He explained that the session would focus on finding ways to scale up MFIs in Africa and on drawing conclusions from the experience of the panellists.

Eric CAMPOS started his presentation by introducing Grameen Credit Agricole Foundation (GCAF), which is a non-profit Foundation performing four different business activities: Lender for MFI, Investor in social business companies, Technical Assistance Provider for MFIs and Researcher in agriculture insurance product for farmers. GCAF's mission focuses mainly on two continents: Asia and Africa. The Fund does not distribute dividends, and investors recycle any capital they gain into new social business initiatives. Investments are measured against the quality of the business plan, the robustness of the business model, and the social impact envisaged. Campos explained that it is challenging to find finance for agricultural value chains in Africa. Farmers' incomes are highly subject to volatility; and climate change is only making things worse. He added that there is an increased need for agricultural insurance schemes, stressing that the sector needs to find new business models to enhance village economies and scale up African MFIs in rural areas.

Grégoire DANEL-FEDOU introduced Advans Group, a network created in 2005, focused on creating new MFIs and providing business loans to SMEs, which operates in Africa, the Middle-East, and Asia. Danel-Fedou shared a positive experience of how to bring scale to operations in Africa. He gave the example of Advans Côte d'Ivoire, a network of 14 branches that started operations in 2012. Currently, the network has 85,000 clients, EUR 45 million in deposits and 580 staff, with a gross portfolio of EUR 100 million. Danel-Fedou explained that the microfinance market in Côte d'Ivoire was undeveloped, but there was strong agricultural activity, good infrastructure, conducive regulatory framework and legal environment, good macroeconomic environment and stable currency and inflation. In this context, the main success factor of Advans was the creation of strong local partnerships with banks, retail distributions, B2B equipment and product suppliers, mobile network operators (MNOs), crop exporters and farmers' organisations. These partnerships allowed Advans Côte d'Ivoire to have good and diversified distribution networks, decreased distribution costs, and increased outreach to rural areas. Danel-Fedou stressed that the financial institution is only a part of the value chain, and it's essential to integrate other parts of the value chain to mitigate risks, increase outreach and add value.

Edmund HIGENBOTTAM presented Verdant Capital, a pan-African investment bank that is focused on inclusive financial institutions. His presentation highlighted the financial challenges to scaling up. He mentioned that, although the micro­finance investment vehicle (MIV) community is growing exponentially, only 10% of the total assets under management of the MIVs are invested in Africa - which intensifies the problem for smaller African MFIs. He explained that MFIs of different sizes face different challenges when it comes to raising finance. Small MFIs, have difficulties because MIVs typically fund MFIs with a capital higher than USD 5 million. This means that access to funding is easier for small-medium sized MFIs with capital of more than USD 5 million and non-deposit taking license. However, these MFIs are exposed to wholesale financing as an exclusive funding source, and find it challenging to accumulate enough regulatory capital. As MFIs become larger, they can tap into development finance institutions (DFIs) as well as MIVs. Stock markets may be an additional source of capital, but not all African countries have a stock market. Larger MFIs usually turn into depositing taking microfinance banks, which then need to understand that deposit mobilisation is a long-term strategy. It may take a very long time for deposits to become a significant percentage of total assets. Higenbottam then emphasised that, if MFIs need scale to exploit cost economies and generate profit, they are not going to get that scale without external capital. Moreover, without scale they are not going to generate sustainable recurring profits and will not be able to drive their growth in risk weighted assets. He added that it becomes more difficult for private equity to provide permanent regulatory capital to financial institutions. He explained that initial public offerings (IPOs) are commonly used in India for MFIs as a means of raising finance, but are more uncommon for African MFIs as the average deal size does not justify the listing costs. Higenbottam ended his presentation by raising awareness on the importance of mergers and acquisitions both domestically and internationally for scaling up.

Alexandre NAYME explained that Africa is underrepresented in BNP Paribas' overall portfolio, at 13% of its operations. Having investments in several regions of the world such as Latin America, Asia and Europe, BNP Paribas is involved in Africa mostly via direct funding to MFIs. He mentioned that MFIs in Africa are relatively smaller than those in Latin America or Asia. This is because of believed higher operational burden when aiming to reach rural communities, associated to infrastructure issues and limited capacity to develop alternative distribution channels. Moreover, group loans are less common in African MFIs, leading to smaller multiplier effects. Nayme also explained that BNP Paribas uses the number of beneficiaries impacted by the microfinance activity as their key performance indicator which led the organisation to operate more in Latin America and Asia, as they can reach more beneficiaries in those regions. He stressed that synergies with local banks and investors are extremely important to be able to scale up African MFIs. Moreover, the sector needs to decrease financing and operational costs while increasing outreach in rural areas. He ended his presentation by mentioning that FinTech can play an important role in achieving those goals and enabling the scaling up of African MFIs.

DISCUSSION

Djobo asked the panel to draw some conclusions from the session. Campos talked about digitalisation and working with mobile providers that may not necessarily have the same mission of financial inclusion and social impact. He explained that we need to use technology to scale up African MFIs, but we need to be careful and put client protection at the forefront. He also addressed climate change and its impact on the most vulnerable in rural areas, stressing that microinsurance models should be developed to protect that segment of the population. Danel-Fedou emphasised again the importance of partnerships to add value in value chains and to share knowledge.

Higenbottam talked about four issues that need to be addressed to scale up MFIs in Africa. Firstly, more and smaller funds are needed to do entry level funding to smaller and younger MFIs and help them get around a Catch-22 situation. Secondly, more and broader solutions are needed for equity and hybrid capital for MFIs. Thirdly, more mergers and acquisitions are needed as scale begets scale. Larger institutions can raise capital more easily and cheaply, and can have a larger impact. Lastly, he emphasised the need for parametric insurance as there can be no portfolio diversification on the risks imposed by climate change. Nayme added that, as we are moving towards more digitalisation, we should not forget our mission of enabler of social impact.