UNITED NATIONS CAPITAL DEVELOPMENT FUND    Microfinance

Issue 10 / March 2005

Issue Table of Contents

Marketplace

Made by Microentrepreneurs

Update

on the International Year of Microcredit 2005

Upcoming Events

Conferences, events and trainings.

Links

New websites and publications.

Share your news!

If you have a current news story or know of an upcoming event that would be of interest to the network,
please email the Editor, Vanessa Ward.

Sign up

to receive Microfinance Matters by email

Past Issues

1. Why was the monetary union of West African states created? What has this union achieved?

   The West African Monetary Union (WAMU) was created in 1962. It currently groups together eight West African States: Benin, Burkina, the Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal and Togo. These eight countries have a surface area of about 3.4 million km2 on which about 80 million people live.

   WAMU is particularly characterised by a common convertible currency, the CFA Franc which, since 1999, has been pegged to the euro at a fixed rate of 655.957 CFA Francs to one euro and is the legal rate in the Member States. Another special feature of the WAMU is the organisation of the financial sector which, on the basis of the provisions of article 22 of the Treaty which incorporated it, is regulated by standard Legal Texts which are proposed by the Central Bank of West African States (BCEAO), an issuing institution common to the eight Member States of the Union. It is by virtue of this prerogative that the BCEAO, in 1993 and 1996, drew up legal texts specific to microfinance or decentralised finance.

2. What are the characteristics of the microfinance sector in West Africa? What challenges does the sector currently face?

   • A relative diversity of the legal forms of the institutions which are involved in the sector. Hence, alongside the cooperatives or savings and credit mutual societies, there are village savings and credit banks, limited companies and development projects with parts exercising financial activities;
   • The existence of a legal framework specific to microfinance which includes:

     • a law relating to the regulation of the savings and credit cooperative or mutual societies,
     • a master agreement for the institutions which are not incorporated in a cooperative or mutual form,
     • institutions of the Central Bank which define the framework by which the institutions collect and communicate financial information to the Monetary Authorities in charge of the supervision of the sector. These instructions particularly specify the past due credit provisioning rules, the account end date as well as the short, medium and long term ratings.

   Using these provisions, data has been collected from the institutions since 1993 - the date on which the regulatory texts were adopted.

   This data enables the bank to indicate that since 2004 there are about 650 microfinance institutions which have about 3,000 service points. These entities offer financial services to about six million customers out of a total population of 80 million inhabitants. One of the main characteristics of microfinance in WAMU is the collection of savings by all institutions who so wish. In 2004, nearly 248 billion CFA Francs, i.e., about 378 million euros at the rate of 655.957 CFA Francs to one euro or 488 million US dollars, were thus mobilised. Local resources (deposits and equity) represent between 75 and 80% of the total assets of the sub-region's microfinance institutions.

   This sector has been booming since the date the legal framework was put in place, reflecting the increased confidence of the population. The main challenges in the sector result from this huge expansion. They may be summarised as a series of barriers which should be lifted to ensure the continuation of growth in access for a greater number of people, while conserving the financial viability of the institutions. Depending on the institutions involved, the action priorities are as follows:

   • Monetary authorities in charge of supervision: set out the legal framework to take account of the rapid evolution of the sector and put in place a supervision system which is adapted to the special nature of the sector and which operates at a controlled cost.
   • Microfinance institutions:

     • reconcile the objectives of offering services to the poor and conserving financial viability;
     • avoid having the significant increase in the volume of transactions become a source of embezzlement or deterioration of the quality of the loan portfolio. Hence the necessity for institutions to have modern and effective management information systems (MIS). This will help to improve the management of the increasing volume of transactions as well as to reinforce internal auditing.

   • Development partners and other players involved: maintain the support to the sector, by favouring the capacity reinforcement actions of the different players and contributing to the financing of investments which will enable the modernisation of institutions with a view to reducing their involvement costs.

3. You were one of the first African financial sector leaders to see the importance of microfinance in fighting poverty. Can you comment on the importance placed on microfinance at the BCEAO?

   The support of the BCEAO to the microfinance sector to fight poverty directly began in 1992. This involvement resulted from the following: the restructuring of the banking system of the Member States of the WAMU in the 1980s caused the disappearance of several credit institutions, particularly the development banks. These institutions had the special feature of being involved in rural and urban areas, with members of the population usually neglected by traditional credit institutions (farmers, craftsmen, young graduates, micro or small entrepreneurs, women engaged in income generating activities). To maintain these populations' access to financial services and thus contribute to enlarging the local economic base, the BCEAO committed to promote new financial players, particularly microfinance institutions, by drawing up a legal framework specific to their savings and credit operations. This text, which is different from the one applicable to the banks and financial institutions, offers a certain number of advantages in terms of the incorporation procedure.

   This orientation was justified by the characterstics of the microfinance institutions in terms of operations and structure (local financial institutions whose governance and audit mechanisms link the clients and are relatively effective compared to the results recorded by the traditional banks).

   The results obtained ten years later confirm the pertinence of these choices both in terms of the range of services, number of clients and repayment rates whose indicators have proved to be better focussed than those of the traditional credit institutions. Mindful of the importance of the sector, the BCEAO, in 2003, created a division within its Economic Studies and Currency Department, responsible for its supervision and promotion, in this case, the Decentralised Financial Systems Division (DSFD).

4. The BCEAO is currently undertaking a regional programme to provide support to microfinance over the period of 2004-2008. Can you describe this initiative? What are the goals? What are the challenges?

   The results recorded by microfinance entailed the necessity to consolidate the acquired knowledge in order to enable the expansion to continue. The Regional Decentralised Finance Support Programme (PRAFIDE) - we also use the terms decentralised finance or local finance to designate microfinance - was established from an operating report on the microfinance sector drawn up by consultants and the employees of the BCEAO. It essentially has four parts which are the layout of the legal framework, the reinforcement of the internal and external supervision, the implementation of capacity reinforcement actions for the players involved and the improvement of the information available on the sector.

   In its guidelines, the PRAFIDE aims to support the adaptation of the players and institutions to the changes which took place between 1993 and 2004 and, thanks to the planned modernisation, to enable strong contribution from decentralised finance to the fulfilment of the Millennium Development Goals (MDGs).

   In fact, modernisation should cause an improvement in financial viability resulting both from a significant increase in the volume of transactions due to increased access, and from a decrease in the cost of transactions engendered by the automation of transaction processing which is now possible with greater use of information and of the new information and communication technologies.

5. The BCEAO is also carrying out an initiative to build a centralized management risk system for microfinance institutions. Can you explain how this system is being implemented? How have microfinance institutions responded? Who will have access to the data collected, and how will it be used?

   The planned central unit of the risks and debts for microfinance is strongly linked to the modernisation of the MIS of the MFI. It is an additional tool to prevent the risk of over-indebtedness and therefore of increasing payment incidents with regard to the credit clients. This project, which is one component of the PRAFIDE, has become a necessity both for the MFI and for the Supervision Authorities due to the strong growth in the number of institutions, customers and the volume of loans which has made the possibility for a borrower to benefit from several loans from institutions whose intervention areas are very close by, effective. The finalisation of this tool, which already exists at the bank and financial institution level, will enable microfinance and particularly the declaring MFI to obtain from the Central Bank, under certain conditions, data on the actual indebtedness level per individual and per sector prior to setting up a new loan. In this system, MFIs are duty bound to declare to the Central Bank, according to a predetermined frequency and format, a series of information when granting loans to any customer who is a member of the institution. The information collected is then centralised by signature (individual) and provided in the approved format to all declaring institutions (MFIs which offer credit).

   The success of the project is conditional upon the existence in each institution of effective MIS, capable of collecting and providing the information expected by the Central Bank.

   With regard to the significant increase in payment incidents over these last few years, the MFIs have expressed great expectations in terms of the diligent finalising of this microfinance risks central unit project which will, when finalised, be integrated into the central unit of the banks and financial institutions - as the ultimate goal is to have the most exhaustive possible overview of the actual level of the borrowers' indebtedness as well as the breakdown of the credit lines set up (sector, geographic area, age range, profession, etc.).

   The risks central unit will therefore be both a risk prevention instrument and an economics tool for the decision makers.

6. On April 8, you are gathering leaders from 20 African countries to discuss the challenges of microcredit in Africa. What do you expect to achieve with this gathering? Do you forsee any areas of disagreement and/or consensus about the future of microfinance in Africa?

   The seminar on the stakes and outlooks for microcredit in Africa which the BCEAO is organising on 8 April in Cotonou, falls within the scope of the initiatives which promote the objectives of the International Year of Microcredit. It aims to examine between decision makers (Ministries of Finance and Governors of Central Banks), managers of the microfinance institutions, development partners and private investors, particularly the banks, the conditions which will enable the African continent, through its microfinance sector, to effectively fulfil the objectives assigned by the United Nations to build, by 2015, a finance sector which is accessible to the greatest number of people. Out of the factors which will be decisive in this matter, financial information is the cornerstone of the system to be put in place. It is this conviction which we plan to share with our colleagues to eradicate poverty and give hope in the future to our people.