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> Posted by Andrew Fixler, Associate, CFI
Inclusive financial services in Africa are blooming. Between the turn of the millennium and 2011, the number of African MFIs reporting to the MIX increased from 58 to 397. From 2000 to 2014, the gross loan portfolio expanded over tenfold to $6 billion. Between 2003 and 2009, the number of borrowers served by MFIs in Africa increased from 1.6 million to 8.5 million. These numbers represent the development of an economic development tool for economies with very small financial sectors. It is impressive progress for an undeveloped industry beset by sparse human capital, problematic governance, and minimal external commercial interest.
AfriCap, which was the first private equity fund to invest exclusively in African microfinance institutions, and other microfinance investment vehicles (MIVs) funded by social investors have been a key growth factor through capitalizing MFIs and offering technical assistance and training. This interest is relatively new. The African MIV portfolio grew at an average annual rate of 36 percent between 2006 and 2013. This compares with an average growth of 38 percent for investments in the Latin America & Caribbean region since 2006, and 8 percent in both the Middle East & North Africa and South East Asia regions. The strong connection between MIV financing and microfinance sector growth was also noted in a World Bank paper, Benchmarking the Financial Performance, Growth, and Outreach of Greenfield Microfinance Institutions in Sub-Saharan Africa. The paper, released in 2014, explains the relevance of greenfield MFIs to effecting financial inclusion in undeveloped financial markets. These institutions are financed in large part by equity and debt from development finance institutions, as well as a now-significant cohort of MIVs.
> Posted by Sumaiya Sajjad, Program Manager, Financial Inclusion, The MasterCard Foundation
In Luxembourg recently, I took part in the European Microfinance Week, whose theme this year was “Developing Markets Better”. The event brought together an excellent group of people from various organizations around the world involved in financial inclusion. On the evening before the formal opening of the conference, Accion’s Center for Financial Inclusion hosted a special cocktail reception where I helped to launch the Accion Africa Board Fellowship program – proudly supported by The MasterCard Foundation.
This program aligns strongly with our Foundation’s goal of promoting financial inclusion in order to help catalyze prosperity and reduce inequality in developing countries. As part of that work, we recognize the critical importance of building capacity at all levels of the financial services industry – especially in that segment of the industry serving the poor. We’ve found that strong, committed, and capable leadership can have the most catalyzing effect on entire organizations, improving the quality of their work, and benefiting the clients they serve.
The following post was originally published on the Microfinance Gateway.
As the microfinance industry grows and becomes more complex, governance plays an increasingly important role in managing sound institutions and preventing crises. Corporate governance provides the framework through which an institution’s diverse stakeholders—investors, board members, management, and employees—set the strategic vision, monitor performance, and manage risks.
The Center for Financial Inclusion at Accion has recently announced a partnership with The MasterCard Foundation to launch the Accion Africa Board Fellowship program. The new program will promote peer-to-peer learning on governance and risk management practices at financial institutions that serve low-income clients in sub-Saharan Africa, a region with more than 6.6 million microfinance clients.
We spoke with Beth Rhyne (left), Managing Director of the Center for Financial Inclusion at Accion, and Ann Miles (right), the Director of Financial Inclusion at The MasterCard Foundation, to learn more about their vision for the program.
Good governance helps an institution fulfill its mission, increase efficiency, and improve its ability to attract customers and investors. Why do you think the microfinance industry in Africa needs such a program at this time?
Miles: Good governance begins at the top of any organization. The policies that are set, and the signals that are sent, by board members and CEOs permeate throughout an organization. They are a major component, perhaps the major component, in determining how an organization succeeds in its given mission. So, how a board does its work is critically important, and it’s something that we at The MasterCard Foundation care about a lot.
> Posted by Center Staff
The microfinance industry in sub-Saharan Africa, boasting roughly 6.6 million clients, is growing fast. This expansion of financial services to the base of the pyramid, bolstered by an increasingly diverse array of providers and products, is enabling many lower-income individuals, entrepreneurs, and households to access and use essential tools like loans and savings accounts for the first time. To ensure the stability and success of the institutions that provide services, however, strong institutional governance and risk management needs to be a core priority. A new CFI initiative, generously supported by The MasterCard Foundation, sets out to address this.
> Posted by Danielle Piskadlo, Manager, Investing in Inclusive Finance, CFI
Last year, before I was a parent, my colleague Deborah Drake wrote a blog post asking “What do Governance and Parenting Have in Common?” Now that I am a parent, I would like to draw another commonality between governance and parenting: both are easier said than done!
There is plenty of literature out there on the best practices of parenting but in reality, it is really hard work, full of uncertain information and mixed advice. You may know the importance of letting them cry it out, feeding veggies, limiting screen time, or talking to your kids about risky behavior. However, we also know how hard these things can be to do in practice, and how often they get avoided, explained away, or ignored. It is often hard as a parent to take a long-term view or to experience the short-term pain needed for long-term gain. You just have to pick your battles, hope for the best outcome, and know there will be unforeseen challenges and crises along the way.
Same goes for governance. It is tricky to bring up the difficult conversations at board meetings, hard to think strategically about the long-term when you are busy putting out today’s fires. It is challenging to adhere to all the recognized best practices, and often difficult even to decipher which practices are important to adhere to.
In both parenting and governing, it is helpful to have advice and benchmarks to sort through all the noise. Googling teething or breastfeeding may provide some help, as will reading up on risk management or strategic alignment. But too often, these searches will leave you wondering where you actually stand between “nothing to worry about” and “oh boy, do we have a problem.” This is because these topics are harder to learn from literature and easier to learn from people who have been there.
> Posted by Danielle Piskadlo, Manager, Investing in Inclusive Finance, CFI
I have written in the past about some of the advantages of having women on boards, including research correlating women on boards with better bottom lines. I recently came across a fantastic piece published by the IFC, Women on Boards: A Conversation with (Male) Directors, which does a wonderful job of explaining more precisely how women add value to boards. Here are a few quotes from the male directors that contributed their thoughts to the publication.
- “When women are at the table, there is less joking around and more objective discussion. I’ve also found that women tend to be more sensible and more thoughtful. I think they care much more about how decisions made in the boardroom will impact people.”
- “Diversity brings more energy to the boardroom.”
- “Women provide good balance. The dynamics change because women are more willing to give the other side a chance than men.”
- “Women are more strategy oriented. They tend to look at where the company is heading, whether things are on the right track, and why the company might be diverging from its strategic goals.”
- “Women are more likely to be conservative and more attuned to good risk management. I don’t think they are more risk adverse but they have more of a long-term and sustainable approach to issues and less short-termism.”
So, how do we get more women on boards? All hands on deck.
> Posted by Joseph Smolen, Summer Associate, CFI
At this week’s U.S.-Africa Leaders Summit it was noted that even as sub-Saharan Africa (SSA) enjoys a period of unprecedented economic growth (GDP in developing SSA has increased from $43 trillion to $75 trillion since 2004), lack of financial inclusion remains an issue of paramount concern. In some ways this has been driven by a lack of foreign direct investment (FDI) in financial inclusion vehicles in SSA (primarily MFIs) – less than 10 percent of FDI in MFIs worldwide is earmarked for Africa-focused institutions. Historically, the disproportionately low amount of FDI in sub-Saharan African MFIs has been driven by a combination of the following factors:
> Posted by Joseph Smolen, Summer Associate, CFI
Are MFIs evolving enough to maintain relevance as a driving force in the sub-Saharan African (SSA) economy?
A recent survey of board members of microfinance institutions (MFIs) in SSA revealed two shortcomings at the governance level: 1) MFIs boards and leadership are not effectively incorporating new technologies and 2) there is a systemic lack of awareness related to market forces and competition. Taken together, these two areas of deficient governance suggest MFIs are not evolving quickly enough, and definitely not at the rapid pace of economic growth in SSA.
Which leads us to ask: are MFIs at risk due to their slowly evolving, and sometimes insular, business practices? The answer to this question is an emphatic no….for now. MFIs have been and will continue to be a key driver of economic growth, poverty alleviation, and financial inclusion in the region. However, sub-Saharan Africa is experiencing unprecedented growth, catalyzed by a variety of macro-level influences. This new dynamism in SSA (the second fastest region-wide growth, behind only developing Asia) brings with it faster change than previously seen in the SSA economy. What does this mean for microfinance? Simply that evolution has now become more critical than ever.
The economic changes in SSA bring with it myriad opportunities – both for domestic residents and foreign investors. Most striking is the increasing eagerness for foreign direct investments (FDI) in SSA. Currently, FDI has taken the form of large-scale investment in established institutional players with little effect on the lower income customer base of MFIs. As capital flows continue to seek opportunities, this could easily change, and other players could contest the space MFIs have historically occupied in the marketplace. While financial services to previously excluded individuals does not necessarily have to be provided by MFIs, there are significant risks that the microfinance space will be impinged upon by mainstream market players such as commercial or mobile banks as well as non-mission driven debt funds. The consequences of such changes include:
> Posted by Joshua Goldstein, Principal Director for Economic Citizenship & Disability Inclusion, CFI
The extent of the reciprocal relationship of trust between an employer and employee may be hard to measure, but it may be more indispensable to good governance than a variety of risk management tools. In fact, there are organizations that forego some traditional risk management mechanisms, instead emphasizing the power of trust. One example, according to Andrew Ross Sorkin, writing in DealBook, is Berkshire Hathaway, the American multinational conglomerate that’s currently the fifth-largest company in the United States.
The normative route to good governance encompasses a host of practices including risk management functions, internal auditing, and board committees. A MIX project examining the practices of over 150 MFIs across 57 countries found a positive correlation among institutional governance indicators, suggesting that good governance practices don’t exist in isolation. Putting such watch-dog measures into place, however costly, is increasingly standard practice at institutions both public and private around the world. Without these, who knows what some employees might be tempted to do. It is the price of doing business. Or at least that is the common school of thought.