Scaling Up African MFIs
This article is a synopsis of some of the key take-away points from the “Scaling Up African MFIs” panel discussion at European Microfinance Week in Luxembourg on 1 December 2017. The panelists were Soulemane Djobo (Senior Projects, ADA), Gregoire Danel-Fedou (Group COO, Advans Group), Alexandre Nayme (Head of Social Business and Microfinance Africa, BNP Paribas), Eric Campos (CEO, Grameen Credit Agricole Foundation) and Edmund Higenbottam (MD, Verdant Capital).
Edmund Higenbottam discussed the importance of the availability of funding for microfinance institutions (“MFIs”) in Africa is largely dependent on the size of the institution. Most investors prefer larger investment sizes and therefore larger institutions to invest in. USD 10 million has become the new USD 5 million, so to speak (as the minimum balance sheet size for institutions to be deemed “investable”). Smaller MFIs face a “catch 22” situation: on the one hand they require funding to grow their portfolio, but on the other hand sourcing funding is difficult unless they are large enough. There are a few high social impact investors in the MIV community who fund smaller MFIs. However, the challenge for MFIs to qualify for their funding is in demonstrating high impact lending and a differentiated business model.
Funding is more readily available for medium-to-large MFIs. This is not without risks however. An example is concentration risk, where an institution is dependent a small number of lenders across the board (eg. one or two local investors and one or two international investors). MFIs that “cross-over” into deposit-taking microfinance banks (“MFBs”) can become self-funding over time by taking deposits, but it is a long process to build the capacity to secure “sticky” deposits.
There can also be challenges in terms of equity. Private equity for example, is finite in life, whereas regulatory capital by its nature should be permanent. The IPO market is perhaps better suited to larger companies. As such, there have only been 20 IPOs of MFIs / in the inclusive financial services sector in the past 10 years across Sub-Saharan Africa, with limited after-market liquidity for smaller IPOs.
A solution to some of these challenges, as discussed by Gregoire Danel-Fedou, is for MFIs and fintech lenders to form strategic partnerships with larger institutions (i.e. banks). Such banks lend to MFIs and fintech lenders, who then onlend to SMEs, i.e. the latter institutions become in effect “distribution partners”.
Across the board, four broad solutions are needed to help African MFIs to scale-up:
• More smaller funds aimed at funding smaller MFIs
• Broader solutions for equity and hybrid capital for MFIs
• More M&A
• Parametric insurance to mitigate against concentration risk in agri-lending