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

Microfinance in fragile states 2 1.AFD and fragile states 2. Is microfinance viable in fragile states? 3. What type of support for microfinance in fragile states?

November 30th 2010 Microfinance in fragile states 3 1.AFD and fragile states

November 30th 2010 Microfinance in fragile states 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) AFD and fragile states

November 30th 2010 Microfinance in fragile states AFD and fragile states 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 CountryStartEndTotal €M Afghanistan Cambodia Comoros Congo Guinea Haiti Mauritani a Niger Togo Kenya Madagascar Palestine DRC Total 107.5

November 30th 2010 Microfinance in fragile states 6 2. Is microfinance viable in fragile states?

November 30th 2010 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

November 30th 2010 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 ( ) 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

November 30th 2010 Microfinance in fragile states 9 3. What type of support for microfinance in fragile states?

November 30th 2010 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)

November 30th 2010 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

Thanks! Philippe Serres -