In several African countries the microfinance market has been solely relying on providing microcredit – small microloans to the poor and low-income microfinance segments via commercial banks and non-governmental organizations (NGOs). PROF SHAHINAZ RASHAD ABDELLATIF believes that in some countries there should be a new microfinance law that allows for more financial inclusion and go beyond microcredit.
Needless to say, the participation of low-income groups who have little experience with formal finance and low levels of financial literacy and capability in the formal financial sector posed several challenges. Those segments require microfinance programs that include streamlined, efficient, simple borrower procedures, alternative approaches to collateral, as well as reliable, and convenient financial services tailored to their needs.
Policymakers in several countries in Africa, Asia and the Middle East and Africa (MENA) region have long realized that the potential for economic growth and poverty alleviation is contingent on the development of a more inclusive financial services sector. Yet, the International Finance Corporation (IFC)’s recent study shows that microfinance still reaches less than 20% of its potential market among the world’s nearly 3 billion people in developing countries that have little or no access to formal financial services. Most statistics have shown that most countries in the MENA region still suffers from a low penetration rate; especially in rural areas, in addition to a sizable financing gap as witnessed in the demand from microcredit borrowers which far exceeds the supply.
Review of 2014
Globally, multilateral organizations played a major role in supporting the microfinance sector. IDB and IFC (a member of the World Bank group) were major players in this arena supporting several microfinance initiatives in Kenya, Sudan and Yemen. For example, IFC supported an initiative related to AlKuraimi Islamic Microfinance Bank and the moveable asset registry in Yemen; whereas IDB continued to support initiatives in Sudan.
Asia continued to be an active global player in supporting microfinance initiatives which started off altogether in Bangladesh by Grameen Bank’s experience but was extended to Pakistan and other countries in the region. Grameen-Jameel had several initiatives in Arab countries especially Egypt and Morocco and supported crowdfunding initiatives with KIVA.
In Egypt, the non-banking financial regulator – Egyptian Financial Supervisory Authority (EFSA) has increasingly revived its position in the region and embraced financial inclusion as one of their policy objectives permitting the entry of new players; mainly microfinance institutions (MFIs) with legal status as non-deposit-taking financial institutions. The law was passed in November 2014 and EFSA has issued several decrees to regulate the market including the maximum credit exposure cap of EGP100,000 (US$13,070) per client and the types of microfinance products MFIs shall provide. In addition, EFSA is currently establishing a regulatory framework that allows an array of financial products and services and yet still provides effective consumer protection mechanisms for the overall sustainability of the financial market system. Under the new microfinance law, microfinance shall be provided by either newly established MFIs or transformed NGOs.
Preview of 2015
However, the immediate challenge in 2015 is the transition of some NGOs into a formal financial intermediary. Yet, more MFIs are expected to emerge in response to the entrepreneurial poor’s unmet demand for financial services. Best practices in 2014 have shown that the poor are bankable, less delinquent and that banking with the poor can be profitable and sustainable. Microfinance can be a profitable and appropriate niche for new entrants — banks — especially those that are active in retail banking or consumer lending. This could encourage them to establish their own subsidiaries to capitalize on the advantages that the new microfinance law provides in addition to achieving sustainability and outreach — in terms of number of borrowers – through expanding its microfinance programs nationwide across all branches. This could bring about economies of scale to cover operational and financial costs. Moreover, microentrepreneurs are willing to pay high interest rates for convenient and quick access to well-designed financial services.
In addition to microcredit, more MFIs are shifting from conventional to Islamic microfinance, using Islamic finance principles such as Ijarah, Mudarabah, Murabahah, or Musharakah to meet the needs of Shariah compliant microfinance poor segments, which may be constrained by social, cultural, or religious barriers that usually prevented them from dealing with the banking system.
In addition, MFIs are expected in the future to provide a complete microfinance solution to expand the range of financial products offered to the poor beyond simple lending or microcredit to include other non-banking products — such services would include microhousing, microleasing, microfactoring and microinsurance without separate licenses such as in Latin America. To illustrate, microleasing is often a viable alternative for MFIs directly or in collaboration with leasing companies indirectly (lessors) in emerging countries to expand into micro and small enterprises (MSEs) longer-term asset financing (fixed assets or capital expenditures (CAPEX)) and for borrowers (lessees) who did not previously have access to asset financing.
In addition, in countries where MFIs and microleasing companies are not allowed to accept deposits and microfinance segments with no savings, it is expected that there should be an alternative means to encourage savings. Alternatively, a new microinsurance law may play a crucial role in the future to alleviate poverty and create sustainability among the poor, low-income microfinance segments. This could be done by encouraging savings through low-premium contributions collected on a periodic basis among microentrepreneurs in the poor segments. Meanwhile, this could also help MFIs to reduce their credit risk through collaborations with microinsurance companies.
The emergence of new MFIs in the region reflects the growing trend of fragmentation of banking conglomerates into various subsidiaries of the same group that presents a wide array of non-banking financial services such as investment funds, asset management, leasing, mortgage, insurance, and microfinance.
Prof Shahinaz Rashad Abdellatif is the executive director of Financial Services Institute, Egyptian Financial Supervisory Authority. She can be contacted at [email protected] .