|
|
|
|
 |
|
UNITED NATIONS CAPITAL DEVELOPMENT FUND Microfinance |
Issue 2 / March - April 2004 |
|
News | When, Where and How: Donor Struggles in Congo’s Microfinance Recovery By Marc Jacquand With prospects for political stability on the rise, the Democratic Republic of Congo (DRC) is witnessing a renewed interest from the international donor community. While the World Bank – managed program for reconstruction and rehabilitation constitutes the most notable and sizeable recovery initiative, various attempts at supporting the local microfinance industry are also underway. In fact, many donors are including microcredit components into their larger post-conflict projects. In many ways, the DRC presents key conditions for the resumption of local microfinance initiatives: a government of national unity composed of former government officials, rebel groups, and representatives from civil society has been formed, bringing new, albeit, fragile hopes for political stability and peace. After a decade-long recession, the country is experiencing modest economic growth and inflation has been brought under control. Yet, daunting challenges remain. Lingering tensions in the east where ex-combatants have yet to be demobilized and reintegrated into local communities, pose a constant threat to the region’s recovery. The country’s infrastructure remains in shambles, rendering certain areas inaccessible. The formal banking sector is of dubious health with under-capitalized yet over liquid banks operating in a very tight market, a low intermediation ratio (14%), and with limited adherence to the Central Bank’s prudential norms. The microfinance sector, which has a long and vibrant cooperative-based history, has greatly suffered from a litany of crises, including: the war and the destruction of infrastructure, significant population displacement, the pillage and looting of the cooperatives, and the freeze and eventual loss of the cooperatives’ investments into government bonds. As a result, many informal and semi-formal institutions have closed shop; those that still operate are deemed to have very weak capacity and the public’s trust in financial intermediaries is extremely low. In the face of such complexity, microfinance donors and investors are confronted with three simple questions: when, where, and how to support the sector? The questions of when and where to support and implement microfinance projects applies to those areas where peace is still very fragile, and where, for instance, international forces are still needed to stem any outbreaks of violence. Microfinance’s function of lubricating economic flows proves useless if the foundations for economic life have yet to be built: disarmament, population settlement, infrastructure, and trade opportunities. Otherwise, microfinance institutions will run into a series of obstacles that include reaching inaccessible clients, demanding payments from gun-toting ex-combatants, keeping track of those that are settling in or relocating outside of the region. All of these elements will put severe strains on the institution’s ability to control delinquency and will severely affect the long-term prospects for developing a healthy number of financial intermediaries. To support an environment better suited to the effective functioning of MFI’s, donors may consider postponing the introduction of microcredit components until other initiatives yield the better conditions. Such initiatives within the development repertoire include quick cash disbursement in the explicit form of grants to capitalize local communities, labor intensive programs to rebuild infrastructure, generate employment and thus increase the incentive to drop arms, and stabilize population flows. The objective is to set the groundwork for interventions, such as microfinance, to become more effective and permanent. In the case of the DRC, where eastern provinces still experience recurring instability and where the infrastructure remains in shambles, does this mean that microfinance should be completely shelved until the entire country receives a diagnosis of stability? In smaller post conflict settings such as Sierra Leone and Liberia, where fighting can spread rapidly throughout the entire country, the need for a complete end to the fighting is necessary for microfinance institutions to operate normally, to plan for expansion, to manage liquidity and to build trust with clients. In a country like Congo, the immense territory offers an opportunity to create “islands” of economic recovery and financial development in stable regions such as Kinshasa, the Bas Congo and Katanga, even if tensions linger in other, more remote, areas. Donors can have a staggered, regional approach and start focusing on cities and provinces where relative political stability and renewed economic activity present more fertile grounds for microfinance to make a real contribution. Kinshasa, for instance, is home to more than 6 million people. A lot can be accomplished now, and many institutions could achieve scale and reach in Kinshasa alone, or in Lubumbashi in the south, even while MONUC pacifies the eastern provinces. In such pockets of recovery, donors can indeed play a major role in assisting microfinance institutions to rebuild their internal capacity and resume the provision of financial services to their clients. The challenge is to determine how to go about it. The development of a microfinance industry has been well analyzed and well documented yet most models that describe the sector’s natural or anecdotal growth assume certain environmental features that are absent in post-conflict contexts such as the DRC. Beyond the theory, the DRC offers an immediate, concrete challenge: where more or less everything needs to be rebuilt, should one start by creating the right political and legal framework, by directly supporting institutions, by training the donors themselves, by training practitioners or by strengthening the Central Bank? There are many options on the menu, and the donors’ understanding of where to begin is for the moment, very limited. Ideally, all of these ”pillars” would be developed simultaneously. In a context of limited donor and investor resources, the challenge is how to prioritize. Some may argue that political and legal frameworks should wait for institutions on the ground to grow and offer evidential material upon which policies, laws, and regulations can be designed. In post-conflict settings however, the need for action on this front may be required as the inflow of international aid often leads to misguided direct government and donor credit schemes designed, albeit altruistically, to provide relief and spur hope for the future among a war weary population. This overzealous desire, on the part of various ministries to promote large subsidized credit programs also stems from a desire to shore up popular support in periods of political transitions and with elections in the offing. The difficulty lies in identifying, among the many policy and legal issues, those which require immediate attention and for which immediate attention would probably be counterproductive. In the case of the DRC, where knowledge of the sector and of its actors remains low, in part due to the inaccessibility of certain regions, laws on microfinance would appear premature. Not only would laws fail to incorporate realities on the ground, but also the inability to enforce and monitor any provisions would render them useless. At the same time, countries emerging from conflict often have inadequate or restrictive legal frameworks that hinder the development of a local financial industry. A modicum of financial liberalization in the DRC has proved instrumental in spurring interest from international financial intermediaries such as FINCA and IPC, thus paving the way for increased provision of financial services to the Congolese population. Post conflict environments present donors and investors with the difficult task of choosing among institutions that have all gravely suffered from the crisis. Faced with weak capacity across the board, should donors and investors support institutions created ex-nihilo or should they strive to build upon what currently exists? The due diligence required before deciding on these options is a complex and time-consuming exercise. In the Congolese context, this difficulty is compounded by the absence of any records, any census, and the inability to reach, physically, many of the institutions. Yet, immediate support to just one or two institutions is critical. In a country that combines a deeply rooted distrust of the financial sector with an immense need for financial services, the growth and sustainability of demonstration models that provide quality services to the population are essential in restoring the public trust, reinvigorating its cooperative tradition, and attracting additional international investments. Based on these observations, one could argue that donors and investors have accumulated a fairly good understanding of when and where to support microfinance. The question of how (or where to begin) remains problematic. Our understanding of the appropriate timing and sequencing of microfinance initiatives remains weak. Evidently, as we all recognize the importance of local contexts, most of the learning will come by doing, through a trial and error process. However, certain guiding principles have emerged from the experience of various post-conflict countries. By looking at the recent history and the current climate of the DRC, we can arrive at the following conclusions: - Long-term commitment: in a context of political, economic and social recovery, the development of the microfinance sector and of all its pillars will take time. Donor commitment and patience are required. Proper due diligence, a perennial weakness on the part of donors, is even more essential in this context. In the DRC, given the immense task at hand, the expected time frame for the development of the sector should be longer than what other countries have experienced. - Judicious restraint: microfinance should not be a priority, nor should it always be included in recovery programmes when conditions for a meaningful and sustainable contribution are not ripe. In such areas, labor-intensive projects, quick and temporary grant disbursement and peace building measures such as disarmament should be the priority. - Judicious engagement: in areas that are no longer at risk, donors and investors can support the development of the microfinance sector, thereby creating pockets of growth that can expand nationally as the country achieves greater stability. - Recognition of local dynamics: during conflicts, people develop their own survival mechanisms at the local level, including informal financing methods. Efforts to rebuild the financial sector should, in part, rely on and add to the existing mechanisms. In the DRC, the long and successful history of the cooperative movement provides an appropriate basis. Given the size of the market and
the demand, this last principle does not mean that other models and delivery
mechanisms should be promoted and supported. A clear indication of a successful
political, economic and social recovery will be when clients themselves are
able to determine which model best fits their needs. At that point, microfinance
in the DRC will no longer be post-conflict. |
