- Published byAlliance Forum Development Programme Zambia Ltd.
African Development Institute, African Development Bank
COMESAFirst Published 2015
- Compiled and Edited by
Dr. Chiara Chiumya
cchiumya@gmail.com+27 76 512 9514
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African Development Institute (EADI), African Development Bank
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COMESA
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Email: CMI@comesa.int- Curriculum Advisory
Prof. Kazuto Tsuji
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TABLE OF CONTENTS
Abbreviations .......................................................................................................................................... 5
1

2

3

4

5

Executive Summary ....................................................................................................................... 7
1.1

Background ............................................................................................................................. 7

1.2

Organisation of the Report ...................................................................................................... 7

1.3

International Perspectives on Microfinance ............................................................................ 7

1.4

International Best Practices in the Regulation and Supervision of Microfinance ................... 8

1.5

Regulating Branchless Banking .............................................................................................. 9

1.6

National Perspectives on Microfinance .................................................................................. 9

1.7Country Analysis .................................................................................................................... 9

1.8

Regional Challenges in Microfinance Development .............................................................. 9

1.9

Strategies for the Development of the Microfinance Sector ................................................. 10

Introduction .................................................................................................................................. 11
2.1

Background ........................................................................................................................... 11

2.2

Training Objectives ............................................................................................................... 11

2.3

Participation .......................................................................................................................... 11

2.4

Session Summaries ............................................................................................................... 12

2.5

Organisation of the Report .................................................................................................... 12International Perspectives of Microfinance .................................................................................. 14
3.1

Introduction ........................................................................................................................... 14

3.2

The History of Microfinance................................................................................................. 14

3.3

Microfinance Today .............................................................................................................. 14

3.4

Microfinance in Africa .......................................................................................................... 15

3.5

Challenges in Microfinance Development ............................................................................ 15

3.6

Strategies for the Development of the Microfinance Sector ................................................. 19

3.7

Conclusion ............................................................................................................................ 21

International Best Practice of Microfinance Regulation and Supervision ................................... 22
4.1

Introduction ........................................................................................................................... 22

4.2

Topic 1 - Preliminary Issues & Prudential Regulation of MFIs ........................................... 22

4.3

Topic 2 - Prudential Regulation of Deposit Taking Microfinance........................................ 25

4.4

Topic 3 - Prudential Supervision and Issues in Deposit Taking Microfinance ..................... 28

4.5

Topic 4 - Regulating the Use of Branchless Banking to Serve the Poor............................... 29

4.6

Rafiki Microfinance Bank Case Study.................................................................................. 30

4.7

Mobile Money Panel Discussion .......................................................................................... 34

4.8

Concluding Remarks ............................................................................................................. 38

National Perspectives on Microfinance ........................................................................................ 40
5.1

Burundi ................................................................................................................................. 40

5.2

The Comoros ......................................................................................................................... 43

5.3

The DRC ............................................................................................................................... 45

1
1

6

7

8

5.4

Egypt ..................................................................................................................................... 48

5.5

Ethiopia ................................................................................................................................. 50

5.6

Kenya .................................................................................................................................... 53

5.7

Madagascar ........................................................................................................................... 58

5.8

Malawi .................................................................................................................................. 60

5.9

Rwanda ................................................................................................................................. 63

5.10

Sudan..................................................................................................................................... 67

5.11

Swaziland .............................................................................................................................. 69

5.12

Uganda .................................................................................................................................. 71

5.13

Zambia .................................................................................................................................. 76

5.14

Zimbabwe ............................................................................................................................. 80

5.15

Djibouti ................................................................................................................................. 83

5.16

Eritrea .................................................................................................................................... 84

5.17

Libya ..................................................................................................................................... 85

5.18

Mauritius ............................................................................................................................... 86

5.19

Seychelles ............................................................................................................................. 86

Microfinance Development Challenges in the COMESA Region ............................................... 88
6.1

Regulation ............................................................................................................................. 88

6.2

Supervision ........................................................................................................................... 90

6.3

Skills and Capacity of Regulators and MFIs......................................................................... 91

6.4

Ownership/Type of Institutions ............................................................................................ 92

6.5

Mobile Money and Financial Infrastructure ......................................................................... 92

6.6

Other Challenges ................................................................................................................... 93

Country Assessments ................................................................................................................... 95
7.1

Introduction ........................................................................................................................... 95

7.2

The Country Assessments ..................................................................................................... 95

Strategy for the Effective Regulation of Microfinance Institutions ............................................. 98
8.1

Introduction ........................................................................................................................... 98

8.2

A Regulatory Framework that Promotes Financial Inclusion ............................................... 98

8.3

Regulators/Supervisors with Advanced Technical Knowledge and Skills ........................... 99

8.4

MFIs with the Institutional Capacity to meet their Mission in a Sustainable Manner ........ 100

8.5

Research and Development that is Current and Relevant ................................................... 100

8.6

Enlightened Politicians and Government Officials ............................................................. 101

8.7

Effective Coordination between Regulators and Other Government Agencies .................. 101

8.8

Strategy Implementation ..................................................................................................... 101

9

Summary and Conclusion .......................................................................................................... 109

10

Bibliography ............................................................................................................................... 110

22

Appendices
Appendix 1: Training Sessions ........................................................................................................... 112
Appendix 2: Microfinance and Public Interest Capitalism ................................................................. 117
Appendix 3: The financial lives of the poor - why connect low income households with formal
financial services? ............................................................................................................................... 121
Appendix 4: Laws, Regulations and Support Systems for the Foundation of Microfinance .............. 136
Appendix 5: Field Excursion; Visit to the local Microfinance Institution in Zambia......................... 140
Appendix 6: Day 4 -Visit to Micro Bankers Trust.............................................................................. 142
Appendix 7: Mobile Money Application, Regulation & Case study in Kenya................................... 144
Appendix 8: Closing remarks presented by Mr Kimanthi Mutua ....................................................... 162
Appendix 9: “Inclusive Growth and Job Creation” Africa MSME Program” .................................... 164
FiguresFigure 2-1: Training programme........................................................................................................... 12
Boxes
Box 4-1: Rafiki Microfinance Bank’s focus areas ................................................................................ 32
Box 4-2: Rafiki’s service innovations ................................................................................................... 33
Box 5-1: Areas covered by the Directives issued by the BCC for the microfinance sector ................ 46
Box 5-2: MFI products.......................................................................................................................... 51
Box 5-3: Key features of the Kenyan Microfinance Law ..................................................................... 54
Box 5-4: Regulations and guidelines issued under the Microfinance Act ............................................ 55
Box 5-5: Prohibited activities for Ugandan microfinance deposit taking institutions .......................... 73
Box 5-6: Principle acts governing the Zambian financial sector .......................................................... 77
TablesTable 1-1: Results of country analysis .................................................................................................... 9
Table 5-1: Categories of MFIs in Burundi ............................................................................................ 41
Table 5-2: Challenges faced by Burundi’s microfinance sector and recommended solutions ............. 42
Table 5-3: Minimum capital requirements for MFIs in Comoros........................................................ 44
Table 5-4: Minimum capital requirements for financial institutions in Comoros................................ 44
Table 5-5: Challenges faced by the Comoro’s microfinance sector and recommended solutions....... 44
Table 5-6: Challenges faced by the DRC’s microfinance sector and recommended solutions ........... 47
Table 5-7: Challenges faced by Ethiopia’s microfinance sector and recommended solutions ............ 52
Table 5-8: Financial institutions in the Kenyan financial sector.......................................................... 55
Table 5-9: Challenges faced by Kenya’s microfinance sector and recommended solutions ................ 56
Table 5-10: MFBs outreach indicators showing access of the poorer segments of the economy ......... 57
Table 5-11: MFI categories in Madagascar and minimum capital requirements ................................. 59
Table 5-12: Minimum capital requirements for financial institutions in Malawi ................................ 613
3

Table 5-13: Challenges faced by Malawi’s microfinance sector and recommended solutions ........... 63
Table 5-14: Number of MFIs licensed in Rwanda, 2007 - 2014 ......................................................... 64
Table 5-15: Number of financial institutions in Rwanda, 2014 ........................................................... 64
Table 5-16: MFI categories in Rwanda................................................................................................ 64
Table 5-17: Minimum capital requirements for Rwandan financial institutions ................................. 64
Table 5-18: Challenges in the Rwandan microfinance sector and suggested recommendations ......... 66
Table 5-19: Challenges in the Sudanese microfinance sector and recommended interventions.......... 69
Table 5-20: Financial institution tiers ................................................................................................... 72
Table 5-21: Key stakeholders of tier 3 ................................................................................................. 72
Table 5-22: Examples of key prudential requirements ......................................................................... 74
Table 5-23 Challenges in Uganda’s microfinance sector ..................................................................... 75
Table 5-24 Classifications for Ugandan SACCOs and NDFIs ............................................................ 76
Table 5-25: Categories of MFIs in Zambia .......................................................................................... 78
Table 5-26: Characteristics of Tier 1 and Tier 2 MFIs in Zambia ....................................................... 78
Table 5-27: Minimum capital requirements for financial institutions in Zambia ................................ 79
Table 5-28: Zimbabwe’s regulatory framework .................................................................................. 81
Table 5-29: Minimum capital requirements for MFIs .......................................................................... 81
Table 5-30: Challenges in the Zimbabwean microfinance sector ........................................................ 82
Table 7-1: Descriptions of the different levels...................................................................................... 95
Table 7-2: Country microfinance development categorisation ............................................................ 96
Table 8-1: A regulatory framework that promotes financial inclusion ............................................... 103
Table 8-2: The effective supervision of MFIs .................................................................................... 104
Table 8-3: To increase the income base to cover the (high) costs of supervision............................... 104
Table 8-4: Highly skilled regulators/supervisors ................................................................................ 104
Table 8-5: MFIs with the institutional capacity to meet their mission in a sustainable manner ......... 106
Table 8-6: Research and development that is current and relevant .................................................... 107
Table 8-7: Enlightened politicians and government officials ............................................................. 108
Table 8-8: Effective coordination between regulators and other government agencies ..................... 108

4
4

ABBREVIATIONS
ACH
AfDB
AFI
AML/CFT
ATMs
AU
B2B
B2P
BCC
BoD
BoZ
BRB
CAR
CBK
CBoS
CBS
CDD
COBAC
COMESA
CRB
CRR
CSBF
DRC
DT
EFSA
EGP
FAS
FATF
FDIs
FDJ
FIA
FSRA
GDP
GSMA
ID
IT
KBRR
KDIC
KEPSS
Ksh
KYC
MAMN
MBT
MDIs
MFBs
MFIs
MFRs
MFS
MGA
MIS
MIX
MNO

Automated Clearing House
African Development Bank
Alliance for Financial Inclusion
Anti Money Laundering and Combating the Financing of Terrorism
Automated Teller Machines
African Union
Business-to-BusinessBusiness-to-People
Central Bank of Congo
Board of Directors
Bank of Zambia
Bank of the Republic of Burundi
Capital Adequacy Ratios
Central Bank of Kenya
Central Bank of Sudan
Central Bank of Swaziland
Customer Due DiligenceCentral African Banking Commission
Common Market for Eastern and Southern Africa
Credit Reference Bureau
Cash Reserve Ratio
Bank and Financial Supervisory Commission
Democratic Republic of Congo
Deposit Taking
Egyptian Financial Supervisory Authority
Egyptian Pound
Financial Access Survey
Financial Action Task Force
Foreign Direct Investments
Djibouti currency
Financial Institutions Act
Financial Services Regulatory Authority
Gross Domestic Product
Global System for Mobile Communication
Identity Document
Information Technology
Kenya Banks Reference Rate
Kenya Deposit Insurance Corporation
Kenya Electronic Payment & Settlement System
Kenyan currency
Know Your Customer
Malawi Microfinance Network
Micro Bankers Trust
Microfinance Deposit Taking Instituions
Microfinance Banks
Microfinance Institutions
Microfinance Regulations
Mobile Phone Financial Services
Madagascar currency
Management Information Systems
Microfinance Information Exchange
Mobile Network Operator

5
5

MOUs
MSS
MUSCCO
NBE
NBFIs
NBR
NDT
NGOs
OHADA
P2P
PAR
PIN
POS
PPPs
RBS
SACCO
SMEs
SSA
UGX
UMRA
USD
VAS
WAEMU

Memorandum of Understanding
Ministry of Social Solidarity
Malawi Union of Savings and Credit Cooperatives
National Bank of Ethiopia
Nonbanking Financial Institutions
National Bank of Rwanda
Non Deposit Taking
Nongovernmental Organisations
Organisation for the Harmonization of Business Law in Africa
Person-to-Person
Portfolio at Risk
Personal Identification Number
Point of Sale
Public Private Partnerships
Risk Based Supervision
Savings and Credit Cooperatives
Small Medium Enterprises
Sub-Saharan Africa
Ugandan Shillings
Uganda Microfinance Regulatory Authority
USA Dollars
Value Addition Services
West African Economic and Monetary Union

6
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1

EXECUTIVE SUMMARY

1.1

BACKGROUND

A capacity building training was held from 2-8 December 2015 in Lusaka, Zambia. The training wasfor central bank officers and microfinance practitioners in the COMESA region and was aimed atdeveloping human capital in the area of microfinance regulation and supervision. This report wascommissioned by the Alliance Forum Development Programme Zambia Limited (AFDP) on behalf of
the African Development Bank (AfDB) through the African Development Institute (EADI), theCOMESA Monetary Institute (CMI) and the Alliance Forum Foundation (AFF), principally toprovide a record of the training proceedings and develop strategies for the effective regulation of
microfinance institutions.
1.2

ORGANISATION OF THE REPORTThe report is organised into 3 parts. The first part provides an overview of international perspectives
on microfinance, focusing on the history, microfinance today and microfinance in Africa. This partalso covers the challenges in the development of the microfinance sector and strategies for thedevelopment of the sector.
The second part covers the training proceedings. This includes international best practice in theregulation and supervision of microfinance, national perspectives on microfinance with a focus onnational microfinance regulatory frameworks, challenges and recommended solutions at national level,
as well as at the regional level.
The third part covers an analysis of microfinance development in the different COMESA member
states, followed by strategies for the effective regulation of microfinance institutions.
1.3

INTERNATIONAL PERSPECTIVES ON MICROFINANCE

This section highlights that microfinance is not new and can be traced back many centuries. In its
present form, microfinance is attributed to Professor Yunus who founded the Grameen Bank in 1983
and won the Nobel Peace Prize in 2006 for his revolutionary social work and long term vision ofeliminating world poverty.
1.3.1 History of “modern day” microfinanceInitially, the focus was on the provision of microcredit, complemented by other services, such as
literacy, primary health and business development, by nongovernmental organisations (NGOs) to poorand low income households for income generating activities using innovative methods to evaluateclients. These innovative methods include group based lending, gender focused outreach,
uncollaterised product offerings, rural presence and social development minded missions. The aim
was to alleviate poverty leading to the belief that microfinance was a panacea to poverty alleviation.
Over time, there was recognition that other financial services, such as savings, payment services,
remittances, insurance and pensions were just as important. This led to a shift in focus frommicrocredit provided by NGO microfinance institutions (MFIs) to microfinance and its provision by awider range of institutions, including commercial banks, credit unions, cooperatives, postal banks andmobile network operators (MNOs). The new paradigm is that of financial inclusion, a concept that isstill evolving.
1.3.2 Challenges in microfinance development
A number of challenges were identified, notably high operating costs, coordination amongst policy
makers, the absence of reliable financial data and national identity documents, challenges in thepolitical process, stringent regulation, some of which coincided with those identified by theparticipants in the training. Strategies for the development of the microfinance sector revolved around
putting in place solutions to deal with the challenges identified and ensuring their implementation.

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1.4

INTERNATIONAL BEST PRACTICES IN THE REGULATION AND SUPERVISION OF
MICROFINANCE

International best practices in the regulation and supervision of microfinance can be found in the
CGAP 2012 publication – “A Guide to Regulation and Supervision of Microfinance Consensus
Guidelines”, which was used for the basis for the discussions held on Day 2. Microfinance has
peculiarities that need to be taken into account when designing the regulatory framework. Some
supervisory tools may not work as well and need modification. These matters are covered in the
Guide.
1.4.1 Definition of terms
The Guide defines microfinance as “the provision of formal financial services to the poor and low
income households”, financial inclusion as “the effective access of formal financial services to all
working age adults” and an MFI as “a formal institution whose primary business is providing
financial services to the poor”. These definitions might differ from the definitions when the terms areused in general every day use.
1.4.2 The distinctive characteristics of microcredit
Microcredit loans, which are typically much smaller than bank loans, have most if not all of thefollowing features; lender’s personal contact with the borrower, group lending, individual lending
based on an analysis of the borrower’s/household cash flow as opposed to credit scoring, low initialloan sizes with gradually larger amounts available for subsequently larger loans, repeat loans for those
who repay their loans faithfully and compulsory savings (cash collateral).
1.4.3 Types of MFIs
Financial institutions that provide microfinance include a variety of NGOs, commercial financecompanies (sometimes referred to as nonbank finance companies), financial cooperatives, banks ofvarious types, state owned financial institutions, including development and postal banks, and statebacked loan funds.
1.4.4 The creation of special laws or amendment of existing ones?
Whether or not to enact special laws or amend existing laws will depend on the country context.
Often, special laws tend to be preferred to avoid opening up the banking laws to revisions that were
not initially intended. Whichever route is taken, care should be taken to avoid regulatory arbitrage
and institutions contorting themselves to meet the requirements of the microfinance laws which tend
to be easier to comply with than banking laws. In this regard, consideration should be given to
regulating the activity rather than the institutional type.
1.4.5 Prudential versus nonprudential regulation
Prudential regulation is exercised to ensure the safety of depositor funds and the stability of thefinancial system. It follows on from this, therefore, that only deposit taking (DT) MFIs should be
prudentially regulated and supervised. Prudential regulation is more expensive for both the regulator
and the regulated and generally more difficult to enforce. Nonprudential regulation focuses on
consumer protection, promoting the provision of financial services by a wide range of institutions andproviding information for monitoring purposes.
1.4.6 Prudential provisions
Because of the special characteristics of microfinance, further consideration has to be given to thespecific prudential provisions which should be applied to DT MFIs and how these should be
differentiated from those of banks. Some examples include permitted activities for MFIs, unsecured
lending limits and loan loss provisions, governance, risk management, loan documentation, branchpremise specifications and reserves against deposits.

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1.4.7 Supervisory tools
Because of the distinctive characteristics of microfinance, some of the supervisory tools such as
capital calls and stop lending orders may not work as well. These considerations have to be taken into
account when designing the regulatory framework. In fact, they may do more harm if care is nottaken. For example, because of the ownership structure of MFIs, it may be very difficult to get the“owners”, who are typically NGOs or developmental institutions, to inject additional capital as theirrisk appetite is very low and where it is likely to be a lengthy process in any case due to thebureaucratic procedures involved.
1.5

REGULATING BRANCHLESS BANKING

Branchless banking presents the greatest potential for increasing access to financial services on the
African continent. A suitable regulatory framework should include; (1) conditions for banks’ andnonbanks’ use of agents, (2) flexible risk based anti money laundering and combating of terrorism
AML/CFT regimes, (3) clear regulatory regimes for nonbanks to issue electronically stored value, (4)consumer protection and (5) payments system regulation. Additionally, the conditions must clearly
articulate who can act as agents and the functions the agents are permitted to undertake (e.g. theopening or handling of accounts), as well as the financial institution’s liabilities for the acts of agents.
Overly tight restrictions will seriously impede outreach.
1.6

NATIONAL PERSPECTIVES ON MICROFINANCE

Fourteen countries were represented at the training. These were Burundi, the Comoros, theDemocratic Republic of Congo (DRC), Egypt, Ethiopia, Kenya, Madagascar, Malawi, Rwanda,
Sudan, Swaziland, Uganda, Zambia and Zimbabwe. Those member states not represented wereDjibouti, Eritrea, Libya, Mauritius and the Seychelles. The country presentations highlighted the factthat the countries had different microfinance regulatory frameworks in place and were at different
levels of development with respect to their microfinance sectors.
1.7

COUNTRY ANALYSISThe country analysis was based primarily on information obtained from the training. Three levels
were developed for the analysis, Level 1 (most advanced), Level 2 (progress made), Level 3 (least
advanced). The three levels were delineated along the dimensions of: (1) the existence of a national
microfinance policy; (2) existing laws/regulations on microfinance; (3) supervisory practices; (4)technical capacity of regulators/supervisors; and (5) the existence of relevant support infrastructuresuch as national identification cards, credit reference bureaux (CRBs), collateral registries, etc. The
results of the analysis are shown in Table 1-1.
Table 1-1: Results of country analysis
Level 1 (most advanced)
Kenya, Mauritius, Rwanda and Uganda
Level 2 (progress made)Burundi, DRC, Egypt, Ethiopia, Madagascar, Malawi, Seychelles, Sudan, Zambia and Zimbabwe
Level 3 (least advanced)
Djibouti, Comoros, Eritrea, Libya and Swaziland

1.8

REGIONAL CHALLENGES IN MICROFINANCE DEVELOPMENT

A number of challenges were highlighted at regional level. Those directly implementable byregulators/supervisors and microfinance practitioners were categorised under the headings of: (1) aregulatory framework that promotes financial inclusion; (2) regulators/supervisors with advanced
technical capacity/knowledge; (3) MFIs with the institutional capacity to meet their missions in asustainable manner; (4) research and development that is current and relevant; (5) enlightened99politicians and government officials; and (6) effective coordination between regulators and othergovernment agencies.
1.9

STRATEGIES FOR THE DEVELOPMENT OF THE MICROFINANCE SECTOR

The challenges identified at regional level and recommended solutions served to inform the strategies
for the effective regulation of microfinance institutions and possibly lay the foundation for identifying
the elements for a Model Microfinance Development Strategy that will provide a blueprint enabling
stakeholders in the microfinance industry to efficiently and effectively perform their roles andresponsibilities and further improve the access level to financial services. The strategies identified
can then be followed by COMESA and COMESA member states to develop the respective
microfinance sectors.

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2

INTRODUCTION

2.1

BACKGROUND

Although Africa has achieved impressive growth in the last few years, averaging 4.8% in the last 10
years, poverty levels continue to rise and the disparity between the rich and poor is getting wider asmeasured by the Gini coefficient. It is believed this trend can be curtailed by promoting inclusive
growth. Pro-poor microfinance has been identified as one of the means by which inclusive growth
can be achieved.
In this regard, a capacity building training was held for central bank officers and microfinancepractitioners from 2-8 December 2014 to build human capacity in the COMESA region to facilitate
the development of the microfinance sector. The training, at which resource persons rich in bothacademia and practical experience shared their experiences with participants, was organised by the
Common Market for Eastern and Southern Africa (COMESA)1 and the COMESA Monetary Institute(CMI)2, the African Development Institute (EADI) of the African Development Bank (AfDP)3 and theAlliance Forum Foundation (AFF) 4 and funded by the Fund for Africa Private Sector Assistance(FAPA)5, the Government of Japan and the Government of Austria.
2.2

TRAINING OBJECTIVES

The training objectives are listed below and included a field visit to a microfinance institution (MFI)
which provided the participants with an opportunity to combine theory with practice. The training
also helped provide a foundation for identifying elements of a Model Microfinance Development
Strategy aimed at providing a blueprint that will enable stakeholders in the microfinance industry toefficiently and effectively perform their roles and responsibilities and further improve the access levelto financial services.
The objectives of the training were as follows:
1) To develop leading/core microfinance human capital in the regulation and supervision of
microfinance in the COMESA region to enhance microfinance development;
2) To improve governance, financial and social accountability in the microfinance sector in the
COMESA region;3) To develop action plans for microfinance regulation and supervision by combining criticalanalysis of the current practices and lessons from other countries’ experiences;
4) To provide hands on training to participants and contribute to knowledge sharing and networking
between COMESA member states on microfinance issues; and5) To promote active discussion between regulators and practitioners to be reflected in the regulatoryenvironment.
2.3

PARTICIPATION

The training was attended by 11 central bank officials and 16 microfinance practitioners from 14
COMESA countries6. The member states represented at the training were Burundi, the Comoros, the1

http://www.comesa.int/
http://cmi.comesa.int/
3
http://www.afdb.org/en/4
http://www.allianceforum.org/en/5
http://www.afdb.org/en/topics-and-sectors/initiatives-partnerships/fund-for-african-private-sector-assistance/
6
There were also 8 (self funded) Japanese delegates.
2

11
11

Democratic Republic of Congo (DRC), Egypt, Ethiopia, Kenya, Madagascar, Malawi, Mauritius,
Rwanda, Sudan, Swaziland, Uganda, Zambia and Zimbabwe7.
2.4

SESSION SUMMARIESThe training was conducted over a period of 7 days and involved participants critically analysing thecurrent status of microfinance regulation and supervision and providing recommendations to improve
the regulatory and supervisory practices at the national level in COMESA countries and then at theregional level. The sessions covered on each day are summarised in Figure 2-1 and detailed inAppendix 1.

Figure 2-1: Training programme

2.5

ORGANISATION OF THE REPORTThis report was commissioned by the Alliance Forum Development Programme Zambia Limited(AFDP) on behalf of the African Development Bank (AfDB) through the African Development
Institute (EADI), the COMESA Monetary Institute (CMI) and the Alliance Forum Foundation (AFF),
principally to provide a record of the training proceedings and, also, identify strategies for theeffective regulation of microfinance institutions (MFIs).
The report is organised into three parts. The first part, which consists of Section 3, provides an
overview of international perspectives on microfinance, focusing on the history of microfinance,
microfinance today and microfinance in Africa. This section also highlights the challenges in thedevelopment of microfinance and strategies for the development of the sector.
The second part (Sections 4 to 6) covers the workshop proceedings. The topics discussed include
international best practice in the regulation and supervision of microfinance (Section 4), national

7

The countries not represented were Djibouti, Eritrea, Libya, Mauritius and the Seychelles.

1212

perspectives on microfinance with a focus on the microfinance regulatory frameworks in the different
member states, the country specific challenges and recommended solutions (Section 5). Also
discussed in this section are the challenges faced at regional level and the recommended solutions aspresented by the training participants (Section 6).
The last part, Part 3, provides an analysis of microfinance sector development in the different
COMESA countries (Section 7). This is then followed by strategies for the effective regulation of
MFIs (Section 8).

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3

INTERNATIONAL PERSPECTIVES OF MICROFINANCE

3.1

INTRODUCTION

Despite healthy economic prospects, sub-Saharan Africa (SSA) has the lowest share of banked
households in the world (12%) and the highest share of poor people, with 50% of the population
living on USD1.25 a day or less. More work needs to be done to expand financial access and many
governments and international funders are keen to contribute.
In the last two decades, many developing countries have witnessed rapid growth in microfinance. The
trends on the investment side have included increasing attention from socially responsible and capital
market investors. From an institutional set up, commercial banks are down scaling, MFIs are moving
up market and convergence is happening between finance for growth (microfinance) and finance forall (financial inclusion). Recognising that microfinance is becoming more and more integrated into
the mainstream financial system brings calls for regulation to set the “rules of the game” in theindustry.
This section takes a look at the history of microfinance from a global perspective, with a focus on
microfinance in Africa. It then goes onto to describe some of the challenges faced in developing the
microfinance sector and the strategies that can be employed to overcome these challenges.
3.2

THE HISTORY OF MICROFINANCE

The idea of microfinance is well established, rooted in rich histories that span the globe. Savings andcredit groups date back many centuries to the Susu tradition in Ghana, the Chit Funds of India and theTandas associations in Mexico. The rise of modern day microfinance is primarily credited to
Bangladesh’s Dr. Mohammad Yunus. As an economics professor, Yunus was frustrated withtraditional economic models in that they failed to help the poor. Compelled to act, Yunus
experimented with providing loans to rural poor women for income generating activities. The
experiment was so successful that it led to the founding of Grameen Bank in 1983. Grameen Bank
pioneered some of modern microfinance’s early foundational principles, such as group based lending,gender focused outreach, uncollateralised product offerings, rural presence and social developmentminded missions. In 2006, Yunus and the Grameen Bank were honoured with the Noble Prize,
recognising Yunus’ revolutionary social work and long term vision of eliminating world poverty.
As widespread awareness and recognition of Yunus’ work grew, the practice of modern microfinancespread to all corners of the world. At the onset of this wave, most MFIs were run as nonprofit
organisations, funded through donations and grants, and purported strong social missions, which were
aimed at alleviating poverty and aiding the poor through a combination of financial and nonfinancialsocial services. Consequently, this led to the belief that microfinance was a panacea to poverty
alleviation and a vehicle that could be used for economic development.
Initially the focus was on the provision of microcredit and (in a lot of instances) services such as
literacy (including financial education), primary health and business development. To a large extent
traditional (conventional) MFIs are still thought of in this manner. Over the years, however, there has
been an acknowledgement and acceptance that the poor need more than just microcredit. They alsoneed other financial services including savings, payment services, remittances, insurance and pensions.
The provision of microfinance (broadly defined) is now offered by a wider variety of service
providers, including nonbank financial service providers; NGOs, banks, credit unions, savings groups,
cooperatives, postal savings banks and mobile network operators (MNOs). The industry isinnovatively transforming to expand access to capital for many around the world.
3.3

MICROFINANCE TODAY

Microfinance markets are strongest in East and West Africa, followed by South Africa. West Africa
consists mainly of financial cooperatives, while East Africa is dominated by nonbanking financial
institutions (NBFIs). South Africa’s microfinance market consists primarily of medium to largebanks, which are downscaling into microfinance. A Microfinance Information Exchange (MIX)1414report found that an increasing number (57%) of new African MFIs are for profit and in 2009, despite
being fewer in numbers, for profit providers accounted for over 70% of the total gross loan portfolio
and 71% of total deposits in SSA. More recent reports reflect a great variation of provider structures
across the continent, as well as an increasingly diverse product offering among those providers, all ofwhich reflects a growing level of maturity within the African microfinance market.
One factor largely responsible for the development of Africa’s microfinance industry is that Africa is
the largest beneficiary of capacity funding grants relative to foreign support funding, accounting for
one third of the USD2.3 billion committed to capacity building globally. Foreign aid and lending
support are slowly tapering, so the urgency to find a sustainable solution is increasing. Despite thesechallenges, the growth potential of this industry is staggering and developmental organisations andinvestors are increasingly looking toward Africa as a region of new possibilities.
3.4

MICROFINANCE IN AFRICA

Africa is innovating in new and exciting ways, leapfrogging over outdated practices to match, and insome cases exceed, the practices of developed regions. The best example of this is Africa’s mobile
revolution. Worldwide, the global cellular market is growing the fastest in SSA, with more than 65%of the population living within reach of wireless voice networks. Kenya is the global example of how
cellular technology can be leveraged to offer financial services at great scale and low cost. In 2005,
Kenyan mobile operator Safaricom, owned by British mobile operator Vodafone, launched a service
called M-Pesa: M for mobile and Pesa meaning money in Swahili. M-Pesa piloted with the MFI
Faulu Kenya, which was open to enabling microcredit borrowers to receive and repay microloans
conveniently using their mobile devices. Interestingly, borrowers expanded the use of the productinformally to pay for goods and services and even to send money to relatives in other parts of thecountry. This client led innovation resulted in Safaricom altering its strategy and marketing M-Pesa
as the mass mobile money transfer service it is today. As it stands, two thirds of Kenya’s 44 million
people subscribe to the service. In 2010, Equity Bank Kenya and Safaricom-Vodafone launched MKesho with the goal of converting millions of M-Pesa users into bank account holders, leveraging a
convenient loan repayment product to improve financial inclusion. With the success of M-Pesa in the
Kenyan market, additional players have entered the mobile financial services landscape; the largest
providers of financial services cellular technology now include Safaricom-Vodafone, Zain, MTN,
Airtel and Wizzit.
These new revolutionary services provide individuals with the opportunity to participate in financial
services at a much faster and more affordable rate. Mobile banking is now offered in 34 of Africa’s
47 countries. There are twice as many mobile money users than Facebook users in SSA. Mobile
technology represents one of the largest and most important opportunities to increase financial service
offerings for millions of financially excluded Africans.
Fostering and improving the microfinance sector in Africa is a top priority across the continent.
National ministers of economics and finance made recommendations to the African Union (AU) in2009 to consider minimum standards and policies concerning microfinance. As of 2010,
microfinance specific legislation and regulations existed in all but three African countries. However,the depth of microfinance regulation varies greatly across the continent, with some countries adopting
detailed microfinance laws, while others regulate microfinance activities under existing banking and
NBFI laws.
3.5

CHALLENGES IN MICROFINANCE DEVELOPMENT

While many developing countries are showing high commitment to including the whole spectrum of
their populations in the formal financial system, they have come up against barriers that make it
difficult to tackle financial exclusion to the degree to which they would aspire. Commonly identified
barriers include high operating costs; poor market response; the need for greater stakeholder
coordination; lack of reliable data as well as national identity documents and systems; and the needfor greater consumer understanding, trust and protection, amongst others.

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3.5.1 High operating costs
Investment in Africa’s microfinance sector is on the rise, but lower than average financial
performance still plagues many of the small MFIs. High costs are the main factor inhibiting
performance. The average operating costs for MFIs in Africa in 2010 equalled approximately 32.6%of their entire loan portfolios. Many MFIs also struggle with inadequate human capital at allorganisational levels due to the limited numbers of skilled senior managers, especially in the areas offinance, internal audit and law. As a result of limited financial and human capital resources, many
MFIs employ inadequate management information systems (MIS) that are ineffective with regards torisk mitigation and cost control. This is partly due to the wide range of MFIs and the types of services
they offer for a wide array of contexts, making it hard for affordable systems to encompass the wide
spectrum of features and functionality that an individual MFI may desire. In some cases, however,some MFIs are just not willing to pay the costs of a good MIS. Not surprisingly, inadequate
management tools have been directly correlated with higher portfolio at risk (PAR) figures.
3.5.2 Poor market response
For financial inclusion to be expanded through enabling regulation, market uptake is critical, andsurveys indicated that this has been a challenge in some places. Passing regulation to improve accessto and use of financial services does not guarantee increased access. Regulators may face challenges
in predicting or understanding market uptake because of a lack of clarity surrounding business models
and the resulting incentive structures needed to motivate financial service providers to pursue harder
to reach markets. Thus, financial institutions often do not have the right motivation, or business case,to abandon their “comfort zone” and explore new areas of activity.
Policymakers in Indonesia highlighted the role of pragmatic discussion with banks to overcome thischallenge, which involves the setting of realistic financial inclusion targets. In Brazil there was afinancial inclusion breakthrough point in the model for banking correspondents when transactions
became profitable because of a policy decision to channel social payments through accounts
accessible through agents. Furthermore, new players, such as MNOs, are entering financial markets
to become suppliers of financial services.
3.5.3 Coordination amongst stakeholders
Financial inclusion policymaking involves multiple stakeholders from different public institutions.
For example, in Sierra Leone institutional responsibility for financial inclusion lies with the Bank of
Sierra Leone, the Ministry of Finance, the Ministry of Trade and Industry, as well as the Ministry ofAgriculture. The absence of platforms to bring relevant agents together may hamper the correct
design and implementation of financial inclusion reforms and policies. Lack of coordination also
increases the risk of bad timing and sequencing of regulatory changes.
Countries such as Yemen are aspiring to improving coordination efforts and others are alreadyembarking on such efforts with the leadership of the central bank. Though coordination is a challenge,
it does not appear to be a deal breaker. The Philippines has made strides in financial inclusion in theabsence of “one” national policy on financial inclusion, but with key parts of the approach framedthrough the National Strategy on Microfinance and with various government initiatives undertaking
financial inclusion initiatives related to their legal mandate and within their areas of jurisdiction.
3.5.4 The absence of reliable financial data on access and usage
The absence of reliable data (even for baseline issues such as “how many people have no access to or
make little use of financial services” or “who they are and where they live”) is still a reality in many
developing countries. This poses a major obstacle to policymakers’ ability to make well informed
decisions, as well as to monitor the progress of financial inclusion initiatives. Without data, financial
inclusion enters a vicious cycle. No data means it is difficult to have a complete picture of thesituation in the country, which in turn results in the lack of political awareness and few subsequentactions being taken. Regulators indicated that policymakers addressing financial inclusion are often

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unable to collect data and therefore develop informed policy because they lack the budget or mandate
for these activities as this policy area lacks a clearly assigned overseeing authority.
3.5.5 The absence of national identity documents
Many countries lack national identity documents and systems required for financial service providers
to perform know your customer (KYC) procedures and open accounts, and in those countries that do,
low income clients often still do not possess such documents. The extent of the challenge of
AML/CFT standards have posed to countries has varied. For some countries, only the banking sector
is subject to these rules; but in others, such as the Philippines, MNOs and other nonbank entities
licensed as “electronic money issuers” must abide by these standards and this requirement, therefore,
can hinder the expansion of financial services through nonbank entity channels as well.
3.5.6 Greater consumer understanding, trust, and protection
Many policymakers expressed consumer protection as a central pillar of their overall financial
inclusion strategy. Some countries like Peru cite demand side barriers, putting emphasis on policies
that are critical to empowering people so that they are aware of financial services and make good useof them. Other countries cite consumer protection challenges related to the supply of financial
services such as over indebtedness. In Mexico and Thailand, the importance of consumer protection(and financial education) as an inextricable part of financial inclusion is highlighted by the prominentplace in their definitions and demand side surveys that measure financial inclusion.
Though originating in developed countries, the recent financial crisis has put the spotlight on
consumer protection and the fact that unfettered access to financial services is not politically palatable.
Past financial crises may have long lasting effects. One of them is the erosion of trust in the financial
system, reducing people’s willingness to use it. This problem is seen in regions like Latin America,
heavily affected by the hyperinflation that occurred during the 80s or the “corralitos” more recently.
Lack of trust is reflected in the low levels of use of financial products, mainly savings accounts; thepredominant use of hard currencies in daily transactions; or, for those who can afford it, theabundance of offshore bank accounts in countries considered to be “safe”.
3.5.7 Challenges of the political process
Despite impressive progress in recent years, the level of political awareness regarding financial
inclusion is still very poor. In some cases it is still being perceived by policymakers as a non urgent
issue thereby relegating financial inclusion to a lower priority level in the political agenda. In
Namibia, one of the most important tasks for financial authorities was to convince policymakers of
the importance of financial inclusion.
The situation is compounded by the low levels of politicians’ understanding of financial sector issues.
This is a problem for regulators, who often see their technical proposals changed and transformed
beyond recognition as the proposals are subject to the political process in Parliaments. The changes
introduced by politicians in the successive drafts of the bill regulating microfinance activity in
Guatemala emptied the proposal from regulators, making it effectively useless.
Financial inclusion also requires a dynamic and flexible approach to regulation that more often than
not is missing. Constant innovation and changes in the sector requires regulators to respond withdynamism to new challenges and opportunities in the market. When this does not happen, regulatory
frameworks quickly become obsolete and unable to satisfy the needs of both customers and financial
institutions.
3.5.8 Market level barriers
While there is great variance across the continent, the lack of market infrastructure and market
information stands out as significant barriers in most countries. For example, while 26 countries in
SSA have public credit registries, only six of these cover microfinance (MIX and CGAP, 2010). Also,
local stock markets are weak or nonexistent, which limits equity investors’ exit options. Progress has
been made on the regulatory side. Most countries in SSA have no restrictions on foreign investments

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in the banking sector. Seventeen countries have adopted national microfinance strategies and 27 haveadopted microfinance legislation to date. Between 2007 and 2009 alone, 14 countries drafted,
adopted, or revised microfinance laws/regulations, including a new law for decentralized financial
systems for the West African Economic and Monetary Union (WAEMU region), which replaced theProgramme d'Appui (PARMEC) law.
Twenty nine countries have specialised microfinance laws, and in 15 others, microfinance is regulated
under banking or NBFI laws. Despite this progress, some regulations are inadequate, andimplementation, including licensing, remains challenging, especially in West Africa. Additional
approval requirements create long delays, branch licensing is cumbersome and there can be frequentand confusing changes in capital and other regulatory requirements. Supervisory capacity is often achallenge and weakly regulated institutions threaten the development of a sound market forinvestment. The next regulatory push on the continent will need to bolster existing policies, ensurecompliance and account for recent innovations and trends in the field, such as mobile banking
services and increased consumer protection.
Finally, macroeconomic instability, as well as political instability and interference, help to explain the
low level of investment in several countries. While regional conflicts have diminished andinvestments are growing in stabilising post conflict countries, such as the DRC, there is still uneaseabout investing in other post conflict countries, such as Sudan. The overall business environment
remains unfavourable in countries such as Chad, Niger, Burundi and the Central African Republic,
while issues with corruption, oil subsidies and instability hamper investments in Nigeria.
3.5.9 Challenges to the development of technology based financial services
While technology emerges as a viable route to financial inclusion in Africa, various obstacles havebeen preventing the development of technology based financial services on a larger scale. These
include the following Stringent regulation
Several African countries are still missing regulatory frameworks that govern the activities oftechnology based financial services, including mobile financial services. For instance, m-payments
require the accepted use of electronic signatures, such as a personal identification number (PIN) toauthorise transactions. If the e-signature is not legally valid, the transaction could be challenged.
There is, therefore, a need to provide status to electronic transactions equivalent to that achieved byphysical signatures. Moreover, international AML/CFT standards require that adequate customer due
diligence (CDD) be undertaken on all new accounts and on single payment cash operations to identify
suspicious transactions. National laws and regulations in Africa typically require verification of: (1)client identity using an official document and (2) the client’s physical address. This constrains theoutreach of technology based solutions as only 22% of African households receive mail at home and alarge share of them do not have identity documents. This calls for clear regulatory frameworks fortechnology based solutions and flexibility in the application of CDD requirements.
Limited interoperability
Reaching an optimal scale for a provider of technology based financial services requires
interoperability at many levels. The ideal situation is to have widespread access to a point of sale
(POS) to allow customers to perform a large spectrum of operations. According to the outcomes of
the Global Payment Systems Survey conducted in 2010 by the World Bank, less than 20% of products
were reported to be fully and partially interoperable. This limits the attractiveness of technology
based solutions to customers and leads to a low level of usage.
Scarcity of qualified agentsThe ability of agents to drive transaction volumes, educate customers on how the service works anddeliver error free transactions have a major bearing on the success of a technology based financial
solution. The 2011 Global System for Mobile Communication (GSMA) Global Mobile Money18
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Adoption Survey shows that agents of the eight fastest growing mobile financial services deployments
had significantly more activity (up to 64.8 transactions per active agent outlet per day) relative toagents of other services (an average of 3.8 transactions per active agent outlet per day). Wellqualified agents are not always easy to find in Africa. It is only through well trained agents thatsuccess of technology based solutions can be ensured.
Low levels of financial literacy and income
Africa holds one of the lowest literacy rates in the world. In this context, the population’s ability tounderstand technology based financial services is not optimal. Hence, financial literacy programs areneeded to inform customers and show them how these services work and the risks involved. In
addition, adoption of smartphone tailored solutions will eventually become widespread in Africa; but
so far smartphones are unaffordable to a large share of the population.
3.6

STRATEGIES FOR THE DEVELOPMENT OF THE MICROFINANCE SECTOR

Depending on the level of the development of financial inclusion policy, there appears to be threebroad groups of countries; (1) some early leaders, (2) others for whom financial inclusion is a priority
but much more policy development is needed and (3) others for whom chronic structural challenges in
the financial sector mean financial inclusion may not be among the top priorities at this time.
Nevertheless, a number of common trends and barriers can be identified.
Emerging trends include recognising: (1)the changing role of policymakers and the importance ofleadership to successful financial inclusion strategies and response; (2) that microfinance can be used
as an entry point for issues of access; (3) that new technology is a very important but not the only
consideration for developing country policies; (4) that savings are the cornerstone of responses; (5)that banks have an important role to play; and (5) that financial inclusion policy can and should not
only focus on the supply side.
Adopting country specific, comprehensive policies at the country level that respond to both demandand supply side barriers will be the most effective in fostering financial inclusion. There is opennessand demand for technology based solutions and Public Private Partnerships (PPPs) to foster access,though these must be gradually introduced within the broad range of evidence based effective policy
solutions for financial inclusion. While there is no standard global solution for rapid replication inmost places, it can be concluded that there is enormous potential to promote tailor made solutions
based on available “best” practices.
The challenge for public policy is to ensure that improvements in access are achieved through theremoval of market and regulatory distortions rather than through price regulation or otheranticompetitive policies that may exacerbate distortions and threaten financial stability. Policies canimprove financial inclusion by addressing imperfections in the supply of financial services (forexample, through modern payment and credit information systems, the use of new lending
technologies and competition in the provision of financial services) and in the demand for financial
services (for instance, through financial literacy initiatives that raise awareness and lead to the more
responsible use of finance).
Policies to support financial inclusion also include initiatives to remove nonmarket barriers thatprevent equitable access to financial services (for example, through consumer protection andantidiscrimination laws). More generally, the challenge for policy is to guarantee that financial
service providers are delivering their services as widely and inclusively as possible and that the use ofsuch services is not hampered by inappropriate regulatory policies or nonmarket barriers that limit theuse of financial services. There are many important links between the public sector and financial
inclusion. Weak public sector institutions are detrimental to financial inclusion. So, improvements inpublic sector governance can have a positive impact on the use of and the access to financial services
in an equitable way. There are also key effects in the other direction: if electronic payments arewidely available, this can boost the efficiency of public sector programs.

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3.6.1 Does regulation increase microfinance performance in SSA?
There is a clear tendency to regulate microfinance activities in SSA with diversified approaches on
several dimensions. These include the type of legislation, the optimal timing for starting to regulate,
and the objective of regulation. Concerning the type of legislation, MFIs are either regulated by aspecialised law or accommodated within the banking law. Between these two alternatives, mostcountries have taken a pragmatic approach for the supervision of the sector.
Regulation of microfinance raises high expectations from all industry stakeholders. On one hand,donors and governments believe that regulating the sector will lead to the emergence of sustainable
MFIs. On the other hand, MFIs perceive the regulation as an intermediate step toward deposit
mobilisation, diversification of funding sources and reduction of foreign exchange risks. On the
public policy side, the central issue concerning the supervision of the microfinance sector in SSA israther enforcing existing regulations than concentrating scarce resources on passing new legislation.
Even the best law will not help if enough regulatory capacity is not in place to ensure compliance.
Indeed, it is a major concern that limited supervisory capacity is often reported across SSA. The
quality of the regulatory framework matters just as much, if not more, than the regulatory status of an
MFI. The supervisor should be well equipped for the oversight of financial institutions (including
MFIs) in order to identify problems in a timely fashion and take prompt corrective actions. In
addition, the authority should have a higher restructuring power to turn around weak financial
institutions. Without providing the necessary skills and resources to the agency in charge ofsupervising the microfinance sector, regulated MFIs will remain as vulnerable as their peers with poorinternal governance structures and similar financial performance. For individual MFIs, expectations
will materialise only if an indepth analysis of the supervisor’s regulatory capacity is conducted before
applying for a deposit taking licence. It is ultimately in the MFI’s best interest to be regulated by asupervisory authority that possesses the attributes described above. Otherwise, the result will be a
mix of high supervisory startup costs and ongoing reporting requirements with little or no real benefit.
3.6.2 Funding reasons for regulation
The general tendency toward regulation is often reinforced by MFIs’ own self-interest. Since
regulation remains a precondition for deposit mobilisation in many countries, more MFIs seek totransform into regulated entities to access cheap and local currency deposits. Regulation opens also
the door to a variety of funding opportunities and helps to reduce the overreliance on subsidies.
Donors and microfinance practitioners are well aware that microlenders need to prepare for the day
when subsidies disappear as donors choose to move on. Understanding how regulation affects
performance matters. On the one hand, the costs of designing and enforcing regulatory policies toaddress the specific challenges of microfinance are substantial. On the other hand, complying withsupervisory requirements is costly.
3.6.3 Insolvency regimes
Insolvency regimes are another example where strong credit rights can improve access to finance.
Given that not all SMEs thrive, a legal framework to address the insolvency of business entities isessential to ensure that the resolution of multiple creditors’ conflicting claims are resolved in anorderly fashion and create more extensive opportunities for recovery (for example, fast track
proceedings for small firms with low debt values).
3.6.4 Financial infrastructure
Financial infrastructure interventions are equally important. The availability of private credit bureaus
and credit registries is essential to reduce information asymmetry that is currently prevailing in
African credit markets. Evidence from 42 African countries shows that SMEs are less constrained incountries with both credit bureaus and registries compared to countries with only credit registries.

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3.6.5 The collateral framework
Recent examples showcase the impact of improving the collateral framework in African countries aswell. Ghana has made significant advances in reforming the movable collateral registry legal
framework and upgrading the registry system. As a result, as of December 2012, over 45,000 loans
have been registered since March 2010 and the total financing secured with movable property
accounts for USD6 billion. More than 9,000 SMEs and around 30,000 microenterprises andindividual entrepreneurs have received loans, with women entrepreneurs accounting for a large
number of beneficiaries. Another breakthrough at the regional level is the recent reforms to OHADA8
collateral registries laws.
3.7

CONCLUSION

Africa’s financial system’s underdevelopment and its limited outreach are well documented. Low andvolatile income levels, inflationary environments, high illiteracy rates, inadequate infrastructure,
governance challenges, and the limited competition within the banking industry as well as high cost ofbanking in Africa are some of the factors used in explaining the underdeveloped financial sector andits limited outreach. However, until recently, very little was known about the actual reach of thefinancial sector

8

Ohada is a system of business laws and implementing institutions adopted by seventeen West and Central
African nations. OHADA is the French acronym for "Organisation pour l'Harmonisation en Afrique du Droit
des Affaires", which translates into English as "Organisation for the Harmonization of Business Law in Africa".
It was created on October 17, 1993 in Port Louis, Mauritius. The OHADA Treaty is made up today of 17
African states. These are Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Comoros, Republicof the Congo, Ivory Coast, Equatorial Guinea, Gabon, Guineam, Guinea-Bissau, Mali, Niger, Senegal, Togo andthe DRC.

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4

INTERNATIONAL BEST PRACTICE OF MICROFINANCE REGULATION AND
SUPERVISION

4.1

INTRODUCTION

Microfinance regulation and supervision best practice was covered on Day 2 of the training. The
main objective of this session was to review and discuss the fundamental aspects of microfinanceregulation and supervision and was based on the CGAP 2012 publication – “A Guide to Regulationand Supervision of Microfinance Consensus Guidelines”. The session was divided into two
components; (1) Preliminary Issues and (2) The Prudential Regulation of Deposit Taking
Microfinance. Component 2 was further broken down into four topics as shown below. The session
specifically covered regulatory and supervisory issues relevant to formal financial services for poor
people, microfinance.
Topic 1 - Preliminary Issues and the Prudential Regulation of MFIs



Topic 2 - Prudential Supervision Issues in Deposit-Taking MicrofinanceTopic 3 - Nonprudential Regulatory Issues

Topic 4 - Regulating the Use of Branchless Banking to Serve the Poor

4.2

TOPIC 1 - PRELIMINARY ISSUES & PRUDENTIAL REGULATION OF MFIS

This part covered some of the basic terms and regulatory definitions of microcredit and microfinancewhich may be different from the definitions when the terms are used in general discussion, as well as
the distinction between the prudential and nonprudential regulation of microfinance.
4.2.1 Preliminary issues
Modern microfinance started with a focus on microcredit which then later became microfinance after
embracing the importance of savings, followed by money transfers and insurance services. Providers
identified themselves as MFIs. The earlier thinking was that only MFIs could provide financial
services to the poor, hence the lobbying of regulations for MFIs.
Then came the new paradigm for financial inclusion which is still evolving, with shifting vocabulary
and focus from microfinance towards financial inclusion, bringing with it fundamental changes in thefinancial sector and new players, products and channels. Microfinance was no longer the preserve of
MFIs.
4.2.2 Definitions
Microfinance is defined as “the provision of formal financial services to the poor and low income
households”.
Financial inclusion is defined as “the effective access of formal financial services to all working age
adults”.
Both microfinance and financial inclusion refer to formal financial services delivered by licensed andsupervised entities.
A microfinance institution (MFI) is defined as “a formal institution whose primary business isproviding financial services to the poor”.
4.2.3 Financial institutions that provide microfinance
There are a wide range of institutional types that provide microfinance services. These include thefollowing:

A variety of NGOs;

Commercial finance companies (sometimes referred to as nonbank finance companies);

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

Financial cooperatives of various types;



Savings banks;

Rural banks;State owned agricultural, development and postal banks;Commercial banks; andState backed loan funds.

Many institutions offer financial services to the poor as well as more affluent clients. For these
institutions, microfinance is not necessarily the financial institution’s primary business activity. Thisdistinction can be important. The risks that regulation is intended to address differ in the context of adiversified financial service provider. The Guide focuses on NGO MFIs, commercial microlending
companies, commercial banks, microfinance banks and financial cooperatives.
Although state owned institutions and savings banks are not covered by the Guide, many issues still
apply in that these institutions provide a substantial portion of microfinance in many countries. It is
desirable, therefore, to have the same requirements for both state owned and private owned
institutions. Despite this, there tends to be significant differences in the regulatory treatment of state
owned institutions as there is an assumption that the government will back all liabilities.
The key points to note here are that there is a need to understand the distinctive characteristics of
microfinance. The lack of coordination among different financial regulators and government agencies
on microfinance may raise problems. The cost of regulation must be proportionate to risks involved.
To the extent possible, regulation should aim to be institution neutral (which raises the question ofwhether it is the institution or the activity that should be regulated) and also to minimise thepossibility of regulatory arbitrage.
4.2.4 The characteristics of microcredit
The characteristics of microcredit are that a microloan is much smaller than a conventional bank loan
and for which conventional collateral might not necessarily be obtained from the MFI borrower. The
MFI borrower is typically self employed or informally employed and the lenders use microlending
methodology. Microcredit is distinct from typical consumer credit which usually involves scoredlending to salaried people. Consumer credit raises distinct regulatory and supervisory issues which
are not provided for in the Guide.
The common microlending methodology involves most, but not necessarily all, of the following:

Lender’s personal contact with the borrower;Group lending;Individual lending based on an analysis of the borrower’s/household cash flow as opposed toscoring;

Low initial loan sizes, with gradually larger amounts available for subsequent loans;

Repeat loans for those who repay their loans faithfully; andCompulsory savings (cash collateral).

4.2.5 Special regulatory and supervisory windows for microfinance
Many countries have a distinct regulatory category created for microfinance. In some countries thisextends to a series of special windows with the possibility of the MFI graduating from one window to
the next, such as a non deposit taking (NDT) MFI graduating to a nonbank DT financial institution.

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The decision to open a special window should be considered if the existing legal framework isholding back the market. The decision as to which route to take is, however, often politically driven.
Where the objective is to enable deposit taking, the results have been mixed. Sometimes theconstraints lie in the scarcity of MFI entrepreneurs and investors and or the lack of managers who cancompetently handle the risks involved when lending from deposits. In such cases, opening a special
window by itself may not do much to increase services, at least until investor interest andmanagement skills are better developed.
4.2.6 Create new a regulatory framework or amend existing ones?
Whichever approach is taken, new institutional type(s) should be incorporated into the basket of rulesthat apply to similar institutions offering similar services. This makes regulatory harmonisation more
likely and inconsistent or unequal treatment less likely9. Country factors determine the advisability of
the integrated approach versus creating a separate new framework10.
Lighter or more favourable regulation for MFIs can lead to existing and new entrants contortingthemselves to qualify as MFIs. Speculation on regulatory alternatives might result in the use of the
new window for different businesses than intended and the relicensing under a microfinance windowby those that cannot meet the increases in the minimum capital requirement or other prudential
requirements and with no motivation or knowledge on how to serve low income people.
Caution must be exercised in defining microcredit/microfinance with respect to:

The use of funds – identifying the primary purpose of particular loans may help MFIs and theirclients manage risk, but requiring loans to be used to fund microenterprise may interfere withother valid reasons for which poor people borrow. It is also important to remember that money isfungible and that microloans are crucially important for poor households for both income
producing activities and household expenses and emergencies.



The maximum amount – this introduces two problems for the sector. Firstly, the ability toaccommodate successful clients requiring larger loans and secondly, limits the opportunity tobalance the more costly small loans with less costly larger loans. On the other hand, a highmaximum amount dilutes the targeting to low income individuals and increases the risk ofregulatory arbitrage.

The customer – this may be tempting but can pose practical challenges. A definition referring to“poor” customers might exclude “low income” persons and enforcing compliance can be very
difficult and expensive11.

Collateral requirements - differentiating the collateral requirements of microcredit fromconventional retail banks. This might be limited by the size of the loan. Such a regulatory
requirement should build in flexibility. Some MFIs accept collateral to cover part or full exposureand to enhance repayment incentives.

4.2.7 Prudential and nonprudential regulation objectives and application
Prudential regulation is exercised to ensure the safety of depositors’ funds and keep the stability of thefinancial system, whereas nonprudential regulation does not involve monitoring or assessing thefinancial health of the institution. Nonprudential regulation is focused on protecting consumers offinancial services, promoting a range of institutions that provide a mix of appropriate products and9This applies both to the initial regulatory reform as well as to future amendments.
Policy makers may be reluctant to open up the banking law for amendment because they do not want to triggera review of other issues that have nothing to do with microfinance.
11
In practice some supervisors have allowed flexibility in choosing clients but invoked law to deal with lenders
who claim to be doing microcredit but are actually serving an entirely different type of customer.
10

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services and providing governments with information to carry out economic, financial and criminal
law enforcement policy.
Prudential regulation is more difficult to enforce and more expensive than nonprudential regulation.
It can be a problem where regulators are already stretched, but can be justified when the stability of
the financial system or the safety of depositors’ funds is at risk. There are times, however, when thesystemic regulation of NDT MFIs is justified, for example when the MFI is engaged in financial
intermediation that needs to be prudentially regulated and or a loss in confidence can cause or createcontagious borrower runs.
Considerations in developing the regulatory framework
Some factors to consider when developing the regulatory framework are as follows:

Systemic consequences – the failure of one or more MFIs would typically not destabilise acountry’s whole financial system. Even when MFIs serve huge numbers of customers, MFI assets
seldom account for a large percentage of financial sector assets. Rare exceptions do occur where
wholesale loans to MFIs are a major part of a country’s banking assets. This can be mitigated,
however, by the effective supervision of the banks involved in the wholesale lending of funds to
MFIs.



The cost - prudential regulation is more costly for both the regulator and the regulated.



The risk of loss – the failure of MFIs results in loss for investors and donors. But where there are
no deposits and no loss of the public’s money, there may be no justification to regulate.



Capacity to gauge risks - retail depositors are not capable of evaluating risks whereas owners,
lenders and donors can do so. There may be no justification, therefore, to regulate.

Deposits linked to loans
MFIs often require cash collateral from their borrowers in the form of compulsory savings. Should
these savings be treated as deposits and subject to prudential regulation? There are two views. There
are those who believe that these MFIs should be prudentially regulated because there are times when
the loans are less than the deposits and poor customers cannot afford to lose even a small amount.
Then there are those who believe that these MFIs should not be prudentially regulated because clientsare often net borrowers with savings being a small fraction of the loan balance and protection isachieved through netting off. The middle path would be to license MFIs that intermediate
compulsory savings and not to license those MFIs that keep the savings in trust with a licensed bankor invested in low risk government securities.
Regulate institutions or activities?
Lastly, there is the question of whether to regulate the institution or the activity. Regulation of theactivity would mean subjecting similar activities to similar regulation regardless of the type of
institution conducting the activity. The ability to regulate the activity depends upon the specificregulatory issue being addressed and how the different institutions are regulated and supervised.
4.3

TOPIC 2 - PRUDENTIAL REGULATION OF DEPOSIT TAKING MICROFINANCE

This Topic covered the prudential regulation of deposit taking institutions engaged in microfinance.
4.3.1 Timing and state of the industry
Before opening a new window for microfinance, consideration must be given to whether there iseffective demand, which includes looking at the state of the microfinance industry, the number, size
and types of MFIs, the possibility of new entrants and whether there is a critical mass of qualifying
institutions. There is also a need to look at the capacity to meet regulatory requirements. This
includes determining whether there are entry barriers in the existing regulatory framework and if there
are, whether these barriers can be removed.

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Other questions which need to be addressed are which entity will be responsible for supervision,
whether existing MFIs are likely to transform into DT MFIs if they are not already and the current
financial performance of existing MFIs. Many countries have developed technically sound new
regulatory windows for microfinance but have seen little response because little attention was paid tothe underlying existing fundamentals. Most successful new windows are in countries that already had
a strong microcredit industry before the window was put in place (i.e. the introduction of theregulations did not bring the industry into existence).
4.3.2 Additional considerations
The level at which minimum capital will be set and whether capital adequacy ratios (CAR) should
be set higher than that for banks
Minimum capital requirements should be set at a level which is sufficient to ensure that the MFI cancover infrastructure, core banking systems, initial losses in the case of start-ups (but does not act as abarrier to entry). Regarding CAR, there has been an ongoing debate as to whether the CAR for MFIs
should be higher than that for banks. Higher CARs are called for because of the nature of the
microcredit portfolio, the high administrative costs, the low levels of diversification in the loan
portfolio, the maturity of management and systems and the limitation of supervisory tools that can beused.
The permitted activities of MFIs
The permitted activities of MFIs have a direct bearing on the prudential requirements that MFIs will
have to adhere to, especially with respect to capital and liquidity.
Unsecured lending limits and loan loss provisions
Unsecured lending limits are often made with reference to equity (i.e. as a percentage of equity)which may be impractical for a microcredit portfolio. Performing microloans should have the sameprovision as other loan categories.
The provisioning for delinquent microloans that areuncollateralised, however, should be more aggressive. Because of the nature of microcredit, historicalcollection experience is the best basis for provisioning and classification buckets should reflect tenureof loans.
Governance
The same governance principles apply but may be difficult to enforce, especially with NGO MFIs.
Sound corporate governance underpins effective risk management and public confidence. Boards
must be independent of management and include members with experience in finance and banking, as
well as members who understand the clients well. This is particularly important for the double bottom
line of many MFIs. But NGOs usually have no identifiable owners with little effective board
oversight.
Liquidity risk management
MFIs may need higher, rather than lower, liquidity requirements. Banks can often stop lending for awhile to deal with liquidity problems whereas MFIs cannot do this without undermining the incentive
for their clients to repay their outstanding loans. Furthermore, MFIs may not have access toemergency liquidity. Some regulators have imposed less stringent liquidity requirements to make iteasier for MFIs to operate. This approach is problematic, however, because it is not clear how lower
liquidity requirements are justified from a financial safety point of view.
Foreign exchange risk
MFIs should not borrow or transact in foreign currency without having the capacity to assess andmanage foreign currency risk. Increasingly, MFIs borrow from foreign lenders in foreign currency.
Many MFI managers are not familiar with foreign exchange risk and the tools for managing it. Even26
26

if they do, there are no opportunities to hedge in many countries. There should be limits on an MFI’s
net open position in each currency in relation to the institution’s capital or earnings and subject torelevant fit and proper criteria for its senior management. MFIs’ risk management policies andprocesses should be assessed to ensure risks are well managed.
Loan documentation
Loan documentation needs to be lighter than for banks because microcredit loans usually have no
collateral appraisal or registration, formal financial statements for the borrower’s business, evidenceof formal business registered and compliance with tax obligations. Credit files should still, at aminimum however, contain the loan application, a copy of the customer’s identification (or acceptable
substitute documentation), the loan appraisal (for individual loans, the appraisal includes cash flow
analysis), previous repayment performance, a credit report (where credit reporting service isavailable), the loan approval by the relevant committee or manager, the executed note and lastly, theamortisation schedule.
Branch premise specifications
Branch premise specifications need to be re-examined, but not eliminated. To promote financial
inclusion, some countries have revised branch requirements to accommodate different types of service
points, including the use of agents.
Reserves against deposits
Many countries require banks to maintain reserves equal to a percentage of deposits. Some countries
have exemptions for deposit liabilities below a specified amount. But reserves are a useful tool ofmonetary policy. Reserves do, however, increase the cost of capital funded by deposits. Given that
below market rates of interest are often paid on these reserves, small depositors might be squeezed out
by raising the minimum deposit size. This drawback should be factored into decisions about reserve
requirements.
Insider lending
Where insider borrowing is permitted, there should be “conflict of interest rules” in place and nofavourable terms allowed. Such rules ought to extend to financial cooperatives of which many haveproblems with abuse of insider lending. To deal with this, there may be a complete prohibition of
insider lending or limit the amount insiders can borrow. Moreover, there should be a prohibition of
the granting of loans to fund share purchases. With respect to financial cooperatives, these might be
exempted as members serve in management.
Transformation of NGO MFIs
The transformation of NGO MFIs is a complex process not fully covered by the Guide. Some key
points to bear in mind are that to facilitate the transformation of NGO MFIs into a licensed for profit
DT MFI, regulators may consider adjusting some prudential requirements, such as those relating to
the shareholding and fit and proper board member and senior management qualifications, temporarilyor permanently.
Deposit insurance
Should DT MFIs participate in deposit insurance or is it just an additional cost? If banks are required
to participate, it is often argued that MFIs should too. In most countries, regulated financial
institutions must participate in the scheme. Factors to consider in setting one up are how will thescheme be funded, how will the premiums be determined and assessed, what impact will thepremiums have on the interest rates and fees charged to customers and how will the premiums affectfinancial access. A unitary scheme makes depositor protection more consistent and levels the playing
field. In some countries, different types of financial institutions are subjected to different deposit
insurance schemes. Care needs to be taken, however, that the existence of a deposit insurance scheme
does not result in the financial institution taking on more risk than it otherwise would.

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4.4

TOPIC 3 - PRUDENTIAL SUPERVISION AND ISSUES IN DEPOSIT TAKING MICROFINANCE

4.4.1 Introduction
This Topic explored the challenges surrounding the supervision of depository institutions engaged in
microfinance. Supervisors need the skills and appropriate practices to supervise microfinance, which
differ substantially from the ones that bank supervisors use. This involves a good understanding of
microfinance and the use of alternative supervisory tools because capital calls and forced asset sales
and mergers work less well for MFIs. Moreover, stop lending orders are extremely counterproductive.
4.4.2 Capital calls
Capital calls may be difficult to utilise as MFIs are often “owned” by NGOs and social investors with
opaque structures and lengthy bureaucratic procedures. NGO owners may not have enough liquid
capital available to respond and social investors often have a low appetite for taking on additional risk
in a crisis. Care should be taken, therefore, before using this tool.
4.4.3 Asset sales or mergers
MFI loan assets have little value in the hands of another financial institution because the success ofthe microfinance operation relies heavily on the close relationship MFI staff have with clients. Whena commercial bank fails, its collateralised loan assets can be saved by transferring them to a solidbank or by effecting the merger or acquisition of the bank in trouble. This will seldom work withmicroloans.
4.4.4 Stop lending orders
One of the main incentives for MFI clients is the prospect of obtaining another loan, possibly at ahigher amount, once they have finished paying off the current loan. Removing this incentive will
have a significant negative impact as borrowers stop repaying their loans and this can cause the entire
loan portfolio to become delinquent as soon as word gets out. The alternative would be to stop
lending only to new clients.
4.4.5 Supervision of the microcredit portfolio
It is worth noting that loan file documentation is a weak indicator of risk, the use of confirmation
letters to verify account balances is impractical and the examination of small samples of loan portfolio(as is done for banks) does not work. A better approach is the close review of systems and lending
policies, collection and credit risk management and internal controls. A review of the actual
performance of the microfinance loan portfolio is the best approach to adopt.
4.4.6 Costs of supervision
The supervision of MFIs can be very costly, especially in the initial stages. Subsidies may be needed.
In the long term, governments must decide whether it will subsidise these costs or have MFIs pass thecosts on to their customers. In some countries, the costs of regulation and supervision are notprohibitive due to the maturity and capacity of MFIs and well crafted supervision processes.
4.4.7 The location of the supervisory function
Placing the supervision of MFIs with the supervisor of banks seems like a natural choice but may
raise capacity and skills issues. Alternative models, such as delegated supervision or self supervision,
may be used to address this. Ultimately the decision will depend on the country’s specific situation.
The advantages of placing MFI supervision within the existing bank supervisory authority are that it
takes advantage of existing skills (although there is still a need to take into account the peculiarities of
microfinance), lowers the incentive for regulatory arbitrage, is a better preserve for political28
28

independence, provides for improved communication and information sharing between the
supervisory teams. A separate body12 may lack professionalism, skills, teeth and independence.
Alternative approaches are delegated (or auxiliary supervision),where the supervisor delegates directsupervision to a third party while monitoring and controlling that third party’s work. The
disadvantage of this approach is that it is not easy to delegate supervision effectively. The principal
supervisor has to monitor the delegated entity closely. The delegated responsibilities may include
data collection and processing, offsite monitoring, onsite inspections, recommendations for action,corrective enforcement, cease and desist orders, and, occasionally, intervention and liquidation.
Delegated supervision is most commonly used for financial cooperatives. For prudential supervision,other supervisory agencies may lack adequate resources and the expertise, operational independence
and remedial powers to fulfil this responsibility.
Self regulation and supervision can often be confusing and has proved to be ineffective, especially forprudential regulation. It can work for nonprudential regulation, especially with respect to consumer
protection. It will not necessarily keep financial intermediaries financially healthy but has the benefitsof getting institutions to start a reporting process or articulate basic standards of good practice.
Regulators may require many small intermediaries to be self regulated for political reasons.
4.5

TOPIC 4 - REGULATING THE USE OF BRANCHLESS BANKING TO SERVE THE POOR

4.5.1 Introduction
Branchless banking presents the greatest potential for access to financial services for poor people bylowering transaction costs and improving convenience for the customer. There are two types ofbranchless banking; (1) the bank based model where the customer contract is with a bank or a similar
licensed institution and (2) the nonbank based model where the customer contract is with a nonbank
entity, e.g. an MNO. The regulatory environment is the key determinant in the development ofbranchless banking.
A suitable regulatory framework should include; (1) conditions for banks’ and nonbanks’ use ofagents, (2) flexible risk based AML/CFT regimes, (3) clear regulatory regimes for nonbanks to issue
electronically stored value, (4) consumer protection, and (5) payments system regulation.
Additionally, the conditions must clearly articulate who can act as agents and the functions the agentsare permitted to undertake (e.g. the opening or handling of accounts), as well as the financial
institution’s liabilities for the acts of agents. Overly tight restrictions will seriously impede outreach.
4.5.2 AML/CFT in branchless banking
Branchless banking requires a risk based approach to AML/CFT because many low income
individuals don’t have the identification documentation required and many national AML/CFT
regimes leave no room for remote account opening where agents are permitted to open accounts andor customers permitted to submit data electronically. Furthermore, agents do not have the capacity forburdensome record keeping. The Financial Action Task Force (FATF) recommendation is to adopt arisk based approach which involves the use of simplified measures such as a CDD where transactions
are small and the use of financial identification.
4.5.3 Nonbank issuers of e-money and other stored value instruments
Many countries have, or are considering, the regulation for nonbank issuers of e-money to advancefinancial inclusion. The key points to note are that nonbank issuers should also be subject toregulation and supervision, including liquidity and solvency related requirements. Prudential
regulation, albeit to a lessor extent due to the limited scope of activities, would be required where therepayment of large floats may pose systemic risk. Some of the risk may be mitigated by restricting
the use of the float, requiring that the float is ringfenced and held in low risk, liquid government

12

Such as the supervisor of financial cooperatives (i.e. the office of the registrar of cooperatives).

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securities and or deposited with regulated financial institutions13. Furthermore, these funds must be
held in trust for the benefit of e-money consumers and be subjected to deposit insurance and reserve
requirements.
4.5.4 Consumer protection in branchless banking
Branchless banking raises a new layer of consumer protection because of the use of third parties as theprincipal customer interface. The agent must be required to disclose that it is an intermediary and thatthe customers must know they are not dealing directly with the service provider. Customers tend to
be relatively inexperienced. The display of pricing and fees must be a requirement to reduce the riskof overcharging or being steered to a particular provider if the third party represents several different
providers. Additionally, there must be a clear display of recourse mechanisms and contacts andmechanism for complaint resolution using the same technology.
4.5.5 Interagency coordination
Because branchless banking brings together actors from different industries, including industries
outside the financial sector such as MNOs and retail distributors, regulation and supervision is likely
to involve more than one agency. As such, establishing a coordination body for the agencies
regulating branchless banking can improve the chances of branchless banking. Ambiguities oroverlaps, such as inconsistent AML/CFT requirements between the financial institutions andtelecommunications regulator, can result in conflicting regulation or weak enforcement. Effective
coordination among these regulators is critical.
4.6

RAFIKI MICROFINANCE BANK CASE STUDY

Topic 4 was complemented by a case study of Rafiki Microfinance Bank followed by a panel
discussion. The case study covered various aspects of mobile banking in Kenya, background on
Rafiki Microfinance Bank and the impact of the regulatory framework on Rafiki14. What follows aresome of the points that were highlighted in the case study.
4.6.1 The mobile market landscapeAccording to the International Telecommunication Union (ITU), by May 2014, there were nearlyseven billion mobile subscribers worldwide, approximately 95.5% of the world’s population.
Germany is currently Europe’s largest mobile market and the eleventh largest telecoms market in
the world.



Sweden is a world leading market in terms of mobile usage, mobile penetration and mobile
smartphone penetration. Sweden saw the introduction of the world’s first 4G (fourth generation)
networks in 2009 and today the majority of Swedes are covered by a superfast 4G data network.

Nigeria, Africa’s most populous nation, is the largest mobile market in Africa and the tenthlargest in the world. In 2013, Nigeria surpassed 100 million active mobile subscriptions, which
equates to around 65.8% of the population joining the 100 million club.

4.6.2 Key developments in Kenya’s mobile industry
Kenya has seen growth in the number of subscribers which has translated into sustained revenue forthe industry, from less than 300,000 subscribers in 1997 to more than 27 million in 2014. Third
generation (3G) and 4G (LTE technology) mobile broadband services, successful mobile payments
and mobile banking platforms are delivering additional revenues. As the home to the world famous
M-Pesa, provided by Kenya’s largest mobile operator, Safaricom, Kenya is the world leader with over
17 million Kenyans using cell phones as mobile wallets or bank accounts. In mid 2014, the13This is referred to as fund safeguarding.
The case study was presented by Mr George Mbira, the General Manager of Rafiki Microfinance Bank andcan be found in the Appendix 6.
14

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Communication Authority of Kenya (CAK) compelled Safaricom to open the M-Pesa platform torival networks. From 2007 to 2014, some success in increasing the level of financial inclusion

had been achieved, but 25% of Kenya’s bankable population still does not have access tofinancial services.
4.6.3 Mobile money services performance

M-Pesa – Launched in 2007 with massive growth in subscriber numbers between 2008 and 2009
due to the growth in the number of M-Pesa agencies, as well as subscriber confidence in M-Pesa
as a product.



M-Kesho – Launched in 2010 has experienced sluggish growth. This poor performance has been
attributed to the non optimal partnership between Safaricom and Equity Bank, mistrust arisingfrom disagreements on profit sharing over this product and the launch of similar products with
Safaricom’s competitors.

M-Shwari – Launched in 2012has experienced phenomenal growth, unlike M-Kesho. This has
been attributed to the experience gained from M-Kesho, as well as a steady and fully engaged
working partnership between Safaricom and Commercial Bank of Africa.

4.6.4 Summary of impact outcomes of e-money channels
The facilitation of mobile phone based funds transfer payments system beginning in 2007 hasenhanced financial inclusion, contributed to financial services deepening and led to integration
between traditional banking service platforms and emerging retail payment systems. As at June 2014,
mobile phone financial services (MFS) had over 120,000 agents handling over 25.9 million customers
and approximately 74 million transactions valued at Ksh89.9 billion (USD2.2 billion) monthly.
Mobile phone money transactions were valued at an average of Ksh6.3 billion per day (4.6% ofannual GDP) in June 2014 compared with Ksh0.22billion (0.01% of GDP) in April 2007. The numberof mobile phone money customers increased from 0.05 million in April 2007 to 25.9 million by June2014 with an average of seventy four million transactions valued at Ksh189.9 billion (USD2.2billion)
monthly.
4.6.5 The regulation and supervision of microfinance banks in Kenya
The Microfinance Act of 2006 and the Microfinance (Deposit Taking Institutions) Regulations 2008
issued thereunder set out the legal, regulatory and supervisory framework for the microfinanceindustry in Kenya. The Microfinance Act became operational 2 May 2008. The principal objective of
the Microfinance Act is to regulate the establishment, business and operations of MFIs in Kenya
through licensing and supervision. The Act enables DT MFIs (now microfinance banks (MFBs))
licensed by the Central Bank of Kenya (CBK) to mobilise savings from the general public, thus
promoting competition, efficiency and access. With the 2013 Amendments to the Act, it is expectedthat the microfinance industry will play a pivotal role in deepening financial markets and enhancing
access to financial services and products to the majority of Kenyans, especially those at the base of
the pyramid.
4.6.6 Rafiki Microfinance Bank
Institutional Background
Rafiki Microfinance Bank (Rafiki) launched its operations in the Kenyan market on 7 July 2011, withthe operational scope cutting across urban, peri-urban and rural areas, with youth banking as its nichemarket. Rafiki recently attained industry recognition, including the Best Microfinance Institution in
Kenya (CMA 2013, Citi Bank and Association of Microfinance Institution Kenya), the Best ProductInnovation (Kilimo Advance), first runner up in Best Product Marketing (Chama Supreme Banking)and second runner up in Best Microfinance Bank in Kenya (East Africa Banking Awards 2014, Think
Business).

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Our Existence – Why? What? How?
Founding rationale - The founding rational for Rafiki Microfinance Bank was to complement Chase
Bank in the promise of Chasebank Group’s positioning as a onestop shop financial services provider
in Kenya and beyond. Vide Rafiki, serving the base of the pyramid with modern, progressive andtransformative financial services and products is made possible, specifically to the unbanked and theunder banked, with focus on the youth.
Purpose – Rafiki Microfinance Bank exists to foster positive change in youth entrepreneurshipdevelopment through starting and scaling up youth entrepreneurs in achieving their social andeconomic freedom. By so doing, Rafiki Microfinance Bank shall deepen socioeconomictransformation amongst individuals, families, communities and business enterprises for sustainable
livelihoods, employment creation and wealth generation, while riding on a simple shared prosperity
and financial inclusion model.
Products and services offered are dynamic and include savings, loan facilities, microinsurance,
payments (MTS) and entrepreneurship training. Rafiki’s focus areas are highlighted in Box 4-1.
Box 4-1: Rafiki Microfinance Bank’s focus areas
Key sectors

Customer segments

Delivery channels

AgribusinessRetail Banking

Branches

SalariedBusiness Banking



ATM's



Education

Investment Clubs & SACCOs



Agency Banking



MSME



Trade finance and Treasury

Mobile Banking



Youth



Money transfer services



Housing and Mortgages



Women and Groups

Source: Rafiki presentation

Rafiki Microfinance Bank’s Performance
Customer deposits contribute largely to the funding of Rafiki’s loan book. There has been a pushwithin the organisation to open and operate quality customer accounts. Rafiki closed the month15 with
96,017 customer accounts with a KSh2.6 billion deposit base, recording a growth of 156%.
Customer loans and advances grew by 33%. September 2014 recorded KSh2.9billion, while the prioryear balances were at KSh1.9billion. Rafiki managed to diversify the loan portfolio in 2014, reducing
its dependence on business loans from 73% in 2011 to 34% in 2014. Other business lines that
improved include Housing from 3% to 17%, Asset Finance from 9% to 26% and Agribusiness from
0% to 12%.
Mobile Banking - Deployment Modes
Customer to Business (C TO B)
Definition - These are funds received by the bank from customers through mobile banking.



Purpose for the bank - to receive deposits, loan repayments by clients, increase the bank’s reachand inclusion of its clients and provide a convenience service.

15

November, 2014.

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

Purpose for the customer - it provides an easy way of saving, reduces the cost of banking and it isconvenient and available everywhere.

Business to Customer (B TO C)
These are funds moved from the bank through funds transfer, mobile money transfer and bill payment
using the bank’s mobile banking platform (Elma). Customers can access the services through a USSD(*366#) or a mobile App (Elma application download). Other service innovations are highlighted inBox 4-2.
Box 4-2: Rafiki’s service innovations
Self-Service
Account Balances
Mini Statements
Internal Funds Transfers
Airtime Top Ups
Pay Utilities & MerchantsBusiness Chats
Lifestyle Features
Selling and Buying e-money

4.6.7 E-Money Regulations and supervision
The role of the Central Bank of Kenya (CBK) in financial sector development


Policy – The policy as articulated in the legislation is to enhance the policy profile throughfinancial inclusion and market development/reform through third party, agency banking
frameworks.

Products – Encouraging different products that are cost effective, serve different market segments
and lowering barriers to entry.

Regulation and supervision – strengthening the regulatory capacity and capabilities of thesupervisor to provide appropriate and adequate oversight.

Promoting competition and diversity through; innovative delivery channels such as mobile phonefinancial services (MFS), DT MFIs and technology led agency model among others andappropriate support infrastructure such as financial education, deposit protection, CRBs andconsumer protection.

The sector’s legal and regulatory reforms
These reforms have been of benefit to the microfinance sector. The Amendment of 2011 to theMicrofinance Act permitting MFBs to contract third party agents has made it possible for MFBs toexpand their reach and depth cost effectively, while ensuring the stability and soundness of thefinancial system.
The regulatory framework has provided an enabling environment for MFBs to grow and develop.
The enabling environment includes allowing MFBs to participate in the national payment system that
includes Kenya Electronic Payment and Settlement System (KEPSS) designed to process large value
and time critical payments on a real time basis and the Automated Clearing House (ACH). The
regulatory framework has made allowance for wider products offering window including the ability
for MFBs to offer money remittances and foreign exchange transactions.

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MFBs are required to maintain cash reserves with the CBK. The CBK uses the cash reserve ratio(CRR) as a monetary policy instrument in regulating money supply in the economy. Furthermore,
MFBs are required to price their loan products with reference to Kenya Banks Reference Rate
(KBRR). This promotes responsible finance through transparency (disclosure) in the pricing of credit
products and enhances the transmission of monetary policy signals vide lending rates.
4.6.8 Lessons and recommendations
Drawing on the experience and lessons so far, the recommendation is for the regulator to:1) Continue taking a leading role in the development of the financial sector beyond the traditional
mandate of price and financial stability, embracing innovation in a safe and sound manner andembracing better regulation rather than more regulation;2) Collaborate with sector players for the positive evolution and progress of the microfinance mobilebanking sector;3) Develop financial systems that enhance financial inclusion as this is vital in systematic poverty
reduction through savings mobilisation and productive capital use through credit(especially forthe base of the pyramid); and

4) Encourage market driven interoperability such as the proposed Kenya National Switch inproviding a single switch for retail payments sector including payment cards and mobile moneytransfers and tapping into value addition services (VAS) provided by mobile virtual network
operators platforms as these enhance competition, reduce costs and improve customer experienceand convenience.
4.7

MOBILE MONEY PANEL DISCUSSION

As part of the training, a panel discussion was held to explore some of the developments in mobilebanking in selected COMESA member states. Three countries were represented on the panel,
Burundi, Kenya and Rwanda. The discussions centred around the themes of the regulatory
framework, KYC requirements, transaction limits, the incidence of fraud, costs and benefits andconsumer protection.
4.7.1 The regulatory framework
BurundiBurundi does not have laws or regulations specifically for mobile banking. Remittances and mobilebanking are (mainly) done through commercial banks which are supervised by the Central Bank. In
essence, so far mobile banking has been a product of the commercial banks. But there are othermobile banking operators. Burundi is building capacity and making use of multi-disciplinary teams toeffectively supervise banks, especially those that provide mobile banking.
Kenya
Kenya does not have regulations specifically for mobile banking, but because the activity of mobilebanking forms part of the payment system, mobile banking is regulated and supervised under the
Payment Systems Act of 2011 and Regulations of 2014.
Bank led mobile banking
Where mobile banking is bank led16, the bank falls under the supervisory purview of the CBK Bank
Supervision Department and mobile banking has been treated as a new product. The CBK checks thatthe agreement between the two parties clearly specifies the responsibilities of the parties involved (i.e.
the commercial bank and the mobile phone company). For consumer protection purposes, the16Bank led mobile banking is where the customer contract is with a bank or a similar licensed financial
institution, i.e. it is the bank or financial licensed financial institution that is providing the financial service.

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commercial bank is held accountable for the acts of its agents and cannot abrogate its responsibilities
by invoking indemnity clauses.
Mobile led mobile banking
Where the mobile banking is mobile led17, then the operator falls under the supervisory authority ofthe telecommunications authority. With the Payment Systems Act, however, the Payment Systems
Department of the CBK now has more powers to regulate and supervise mobile banking services
provided by telecommunication companies. The Payment Systems Department can now conduct
onsite inspections of MNOs providing banking services. The CBK has embarked on building
capacity and supervisors must understand technical aspects of mobile banking.
RwandaLike Kenya, Rwanda does not have regulations specifically for mobile banking, but because theactivity of mobile banking forms part of a payment system, mobile banking is regulated andsupervised under the National Payment Systems Act. Payment system participants18 get a different
licence (as opposed to a licence that permits the provision of financial services) and are regulated andsupervised by the department responsible for regulating and supervising payment systems. MNOs aresupervised by a different regulatory authority. However, MOUs do exist between the banks andMNOs. The Central Bank supervises financial institutions and ensures compliance to the guidelines
issued with respect to mobile banking and ensures risks are minimised.
4.7.2 KYC Requirements
Kenya
In Kenya, the KYC requirements are just as rigorous for mobile banking clients as they are for bankclients. An application form must be filled in and acceptable form of identification must be presented
by the applicant to open a mobile account. When making a withdrawal, an acceptable form ofidentification must be presented. For bank led mobile banking, the Central Bank has played a role inensuring that mobile companies insist that there are minimum requirements in place. For
telecommunication companies, the requirements may not be as rigorous because telecommunicationcompanies’ procedures differ from those of banks. Even then, individuals still need, in addition totheir PIN, an acceptable form of identification to operate the account, i.e. to make a withdrawal and tocollect money from an agent. Beyond a prescribed limit, the individual has to go to a branch to effecta transaction. Kenya is fortunate in that it does have a national identity card.
RwandaIn Rwanda, MFIs have not started offering mobile banking but the banks do and have MOUs with
telecommunication companies. The Central Bank does supervise the mobile banking activities of thetelecommunication companies in accordance with the regulations and guidelines in place. The
telecommunication companies are not subjected to the same KYC requirements, but it depends on thesize and nature of operations.
4.7.3 The Incidence of Fraud and Anti Money Laundering
The incidence of fraud has not been as high as one would expect. It has, in fact, been lower than thatfound in conventional banking.

17
Mobile led mobile banking is where the financial product(s) is being provided by a MNO and the customer
contract is with the MNO providing the financial service.
18
Payment system participants are institutions/companies that participate in a payment system and may notnecessarily be a financial institution, such as an MNO.

35
35

Burundi
No major incidences of fraud have been experienced as yet, but the Central Bank is being proactiveby ensuring that mobile banking providers have appropriate risk management systems in place tominimise the possibility of fraud occurring.
Kenya
When carrying out inspections, the CBK checks to ensure that appropriate risk management systems(especially with respect to operational risk) are in place in order to minimise the occurrence of fraud.
Additionally, Kenya is transitioning from magnetic to chip based ATM cards. The transition is being
accompanied by an awareness campaign to inform the public of the importance of keeping passwords
and PINs secret and using identification where necessary. With respect to money laundering, inaddition to the limits on transfers discussed below, financial institutions are required to reportsuspicious transactions to the Financial Intelligence Centre. The CBK also checks the suspicioustransactions reports when they receive the reports and when they conduct onsite inspections
RwandaThe levels of fraud that have been experienced to date have not been significant and have resulted
mainly from consumers not keeping their passwords and PINs secret. These have been handled by thepolice department that deals with financial crime. Rwanda has electronic identification cards whichhave helped locate the source of the problem with respect to fraud.
4.7.4 Limits on Transaction Amounts
BurundiBurundi does have limits on transaction amounts.
Kenya
There are limits on transaction amounts. This is also one way of mitigating fraud. The legislatedsending limit and receiving limit is approximately USD1,000 and USD1,300 per day respectively.
4.7.5 Costs and Benefits
Information technology (IT) costs19
The costs of the IT infrastructure can be very high. From the supervisor’s perspective, the challenge
is in balancing what is enabling for the operators and what is safe for the supervisor to ensure stability
in the financial system. From the operators’ perspective, mobile banking does require a large
investment in IT infrastructure (hardware and software) and systems development; but it is stillcheaper than conventional banking models. There is certainly a compromise of quality (scalability
and security) and cost and buying technology that is functional based on the operator’s size. On
average, the IT expense accounts for over 15% of total expenses and this is not an insignificant
amount. If the business had to start off with one of the top five IT solutions, it is unlikely that themobile banking service provider would be profitable.
Even then, the operational cost is still much lower for mobile banking than conventional banking. For
example, financial institutions generally do not make money on automated teller machines (ATMs)
because ATMs are very expensive (USD18, 000 approximately for a cash dispensing only ATM, i.e.
it is not a smart ATM), especially with respect to administrative costs. It takes a long time to breakeven on an ATM and even some of the medium sized and small banks do not break even but merely
provide ATMs for their customers’ convenience. In comparison to a point of sale (POS), the cost ofsetting one up is approximately USD1,000 and with a reasonable level of transactions, money can be

19

The input for this part was from Rafiki Microfinance Bank.

36
36

made from the POS in a relatively short timeframe, especially because the administrative costs arevery low20. So there is truly a value proposition for mobile/agency banking.
Profitability21
Mobile banking is profitable, especially when compared to the use of ATMs, internet banking andbranches. Firstly, the incremental cost per user is practically nil (zero). The largest cost lies in the
integration with a mobile service provider. Establishing a branch costs a minimum of approximately
KSh25 million. In Kenya, internet use is not that high as yet. Mobile banking is a big issue becauseof the reach of mobile phones, especially in rural areas where hard infrastructure is very poor. Most
households in rural areas have a mobile phone. There is significant potential in revenue streams.
Although operating income might not appear to be all that high, the cost of operating this businesssegment in comparison to other segments is very low22. Although the amounts are low, the number oftransactions is significant. The benefit lies not so much in the increased revenue, but rather in the cost
reduction and reach achieved.
The benefits of providing mobile money23
As indicated above, the costs of providing mobile/agency banking is much lower than forconventional forms of banking. In addition to the benefits already stated, from the consumer’s
perspective, financial services can now be accessed conveniently and affordably. For example,
previous methods of sending money might have involved making use of the post office or someone
going home on the bus. Today, in a couple of seconds money can be sent from a multitude oflocations within Kenya. The small transactions cost approximately USD0.5 to USD2. This is a greatvalue proposition as it is affordable and convenient.
4.7.6 The future of mobile banking
Because of the poor state of infrastructure in rural areas, and taking into consideration the reach ofmobile phones, the provision of mobile/agency banking is currently the most viable option inachieving the objective of financial inclusion. Compared to traditional banking methods, for which inmost cases there is no business case for their establishment in rural areas, mobile/agency banking is amuch cheaper and viable alternative.
BurundiBurundi sees mobile/agency banking as a (profitable) solution to increasing financial inclusion.
Kenya
The range of transactions that can be carried out using one’s mobile phone has increased. For
example, one can use M-Pesa to pay for groceries and there is no need to use a card. In fact, in Kenya,
the use of M-Pesa has become a central part of the Kenyan’s life and has even taken over the use ofcards.
RwandaIn Rwanda, mobile banking has contributed significantly to increasing access to financial services.
Rwanda is now trying to become part of the East African Community (EAC) payment system so as togrow their payment system. Tvio cash has now expanded to Tanzania and future prospects are very
promising.

20
For instance, there is no need to insure money from theft, there are no rental payments, there are no staffing
requirements, etc.
21
The input for this part was from Rafiki Microfinance Bank.
22
For example due to the small number of staff needed to operate mobile banking.
23
The input for this part was from the delegate from the CBK.

37
37

4.7.7 Consumer Protection Measures
General consumer protection provisions
Kenya
Under the National Payment Systems Act, Kenya has provisions that cover consumer protection. The
challenge Kenya has faced is that consumers have not been made aware of their rights and the need tokeep their PIN secret. So this is an area where the CBK needs to conduct an awareness campaign andeducate the public in these issues.
RwandaRwanda has regulations that cover remittances and clearly stipule the obligations and responsibilitiesof the financial institution and those of the consumer. However, the implementation of theRegulations has been problematic. As a consequence, Rwanda still faces a number of challenges indealing with consumer protection issues.
The training of mobile banking users
In Kenya, this is often done by the agents. The agents are motivated because it is in their interest to
have as many users as possible. The use of mobile/agency banking is driven by the need to use theservice and so users are also willing to have agents “teach” them on mobile banking use. In somecases, however, this has led to fraud as in the process of training, the agent has gotten hold of theconsumer’s PIN and personal details. So this is an area that mobile/agency banking providers need tolook out for and find ways to decrease occurrences of this nature.
Consumer protection in the case of bank failure
Kenya
Kenya currently has in place a deposit insurance scheme for commercial banks and MFBs. Deposits
are insured for a maximum amount of KSh100,000 per deposit. With respect to mobile money floats,
the float has to be kept in a commercial bank and managed by a trust with trustees who are neither
part of the management or board of the telecommunications company. These funds cannot beintermediated or used for the telecommunications company’s day to day administrative costs, in otherwords, the funds are ringfenced. Furthermore, the funds must be kept in a number of banks so that therisk is spread in the case of bank failure. It is not clear at the moment, however, whether these funds
are protected by the deposit insurance scheme. And even if they were, the deposit insurance scheme
would cover an insignificant portion of balances so held. The solution to the protection of these floats
is being debated.
RwandaRwanda is currently developing a deposit insurance scheme that will cover mobile banking as well.
4.7.8 Is e-money inflationary?
Concerns were raised that e-money might be inflationary. But because e-money is money that isalready in circulation (i.e. it is simply cash in a different form), it has no inflationary effects.
4.8

CONCLUDING REMARKS

4.8.1 Risk mitigation
Risk is part of business. So if one is looking for a business with zero risk, then no business will be
conducted. The real issue is being able to identify the risks and put in place measures to mitigate therisks. The same applies to mobile/agency banking. The onus of risk mitigation is on the service
provider. The responsibility of the regulator is to ensure that the service provider has mitigated therisk. This is important because it creates the necessary checks and balances in the system.

38
38

4.8.2 The levels of financial education
The level required for the public to appreciate, understand and safeguard themselves, is high and so
this innovation requires a significant amount of awareness, education and information. As was statedearlier, in this whole process of regulation there is a developmental aspect. In the whole concept offinancial inclusion there are gaps that cannot be addressed by financial regulation and it is importantthat these gaps are identified and filled before any regulation or other interventions can work properly.
Once this has been done effectively, the opportunities that this innovation provides are immense. The
biggest cost benefit lies not with the individual, but with the nation. And looking at the cost benefit
analysis at the country level, then there is definitely a benefit in the form of financial access from thesimplified use and demystifying of financial transactions for individuals previously excluded.

39
39

5

NATIONAL PERSPECTIVES ON MICROFINANCE

This section covers national perspectives on microfinance. For each country, it starts off by giving
some background with respect to demography and the economy. This part draws heavily on CIA
factsheet the World Bank development indicators. This is followed by subsection 2 which draws
heavily on the IMF’s Financial Access Survey (2014). The subsections thereafter, namely the
microfinance regulatory frameworks and the challenges faced by each member state, are based on thefact sheets participants were asked to complete prior to the training, the presentations given during thetraining and discussions held. The first 14 country accounts are for the countries represented at thetraining 24 . The last five accounts are for the countries that were not represented at the training,
specifically Djibouti, Eritrea, Libya, Mauritius and the Seychelles.
5.1

BURUNDI

5.1.1 Background
Burundi covers a land mass of approximately 25,700 square kilometres with a population of 10.7
million of which an estimated 50% are women. Approximately 12.1% live in urban areas. The
average population density is 396 people per square metre with 68% living below the poverty line
(2002 estimate). The literacy rate is estimated at 85.6% (83.1% women, 88.2% men). Burundi is alandlocked, resource poor country with an underdeveloped manufacturing sector. The economy ispredominantly agricultural; agriculture accounts for just over 40% of GDP and employs more than
90% of the population. Burundi's primary exports are coffee and tea, which account for 90% of
foreign exchange earnings, though exports are a relatively small share of GDP. Burundi's export
earnings are, therefore, significantly dependent on weather conditions and international coffee and tea
prices. Burundi's GDP grew around 4% annually from 2006 to 2014. Burundi joined the East
African Community (EAC) in 2009.
5.1.2 Access to finance
Access to finance remains limited, with only about 2% of the population holding a bank account and
0.5% using bank credit services. The number of depositors with commercial banks per 1,000 adults
was 42.3 while the number of borrowers was 11.86. The outstanding deposits and loans as apercentage of GDP were 24.95% and 18.41% respectively. The number of ATMs per 1000 km2 was
3.15 and 1.47 per 100,000 adults. Although the number of ATMs across the country has increased,penetration is still low. As such, cash transactions and physical exchanges of payment instruments
largely dominate market transactions. Underdeveloped payment systems, poor creditworthinessinformation on borrowers, weak project preparation capacities and limited abilities to enforce
guarantees also further restrict the expansion of the financial system.
5.1.3 Burundi’s microfinance regulatory framework
The Bank of the Republic of Burundi (BRB) is responsible for regulating and supervising thefinancial sector. Its main objective is to ensure price stability and financial sector stability. Two
departments are responsible for the regulation and supervision of the financial system, the Bank
Supervision Department and the Supervision of Microfinance, Non Banking Institutions and Financial
Inclusion Department.
Burundi does have a microfinance law. The Law was enacted in 2006. Prior to this, the microfinancesector was not regulated or supervised. The Microfinance Law has 25 sections covering various
aspects of supervising the microfinance sector. The main objectives of the Law are to ensure theintegrity of the microfinance sector by vetting entrants and authorising the BRB to regulate andsupervise the sector.
24

Burundi, the Comoros, the DRC, Egypt, Ethiopia, Kenya, Madagascar, Malawi, Rwanda, Sudan, Swaziland,
Uganda, Zambia and Zimbabwe.

40

To date, 29 MFIs have been licensed (Table 5-1). There are 3 categories of MFIs; (1) savings andcredit cooperatives (SACCOs), (2) microfinance companies (which are limited companies) and (3)microcredit programmes.
Table 5-1: Categories of MFIs in Burundi
Institutional type

NumberCooperatives

13

Microfinance companies

15

Microcredit programme

1

Total

29

Only, the last category has a required minimum capital, fixed at MBIF200 (approximately USD
130,000). For SACCOs, a minimum of 300 members are needed for the SACCO to be licensed. The
minimum capital required for commercial banks is MBIF10 billion (approximately USD65,000,000),
while the minimum capital for financial institutions is MBIF6 billion (USD3,875,000).
MFIs are licensed at national level and are not permitted to engage in the following activities:x

Trade in non-financial products;x

Foreign exchange transactions, transfer of funds, securities, financial lease and real estate credit;x

Supply currencies and traveller’s cheques;x

Transact in securities; andxIssuing means of payment.

The microfinance sector is supervised by the Supervision of Microfinance, Non Banking Institutions
and Financial Inclusion Department of the BRB, a separate department from that which supervises
banks. The supervision tools used to supervise MFIs are almost the same as those used for thesupervision of banks except for the prudential standards which are different. There are no notabledifferences, however, for the branch opening procedures for bank and MFIs. The procedures are to alarge degree the same.
There are currently no laws or regulations regarding agency banking, although some banks do operate
through agents. In the microfinance sector, there are no MFIs that have agents as yet. Similarly, there
are no regulations on mobile banking/money. There is, however, a government bill on the National
Payment System from which regulations will be enacted by the BRB with respect to mobile banking.
Although there is no credit reference bureau (CRB) in Burundi, MFIs are required to report positive
and negative information to the Information Exchange Centre housed at the Central Bank. The main
points worth noting with regards to the legislation as identified by the training participants fromBurundi are that the regulatory framework has:x

Improved the credibility and integrity of the microfinance sector by vetting entrants andparticipants into the sector;x

Established the Information Exchange Centre to prevent the over indebtedness of microfinanceclients; andx

Increased the confidence in the sector by establishing minimum business conduct standards andimproved transparency in the sector to minimise the exploitation of microfinance clients.

41

The microfinance sector also has a professional network that consists of 22 members covering morethan 98% of all activities of the microfinance sector. Eighty five percent (85%) of (social) MFIs arelocated in the middle of the capital area of Bujumbura.
5.1.4 Challenges faced by Burundi’s microfinance sector
Some challenges have been identified in the process of regulating and supervising the microfinancesector. These were highlighted by the training participants and include poor corporate governance,
the lack of institutional capacity, poor MIS, inaccurate financial statements and low capitalisationlevels.
For the challenges identified, the BRB has tried to correct any noncompliance to the law andregulations by using the supervisory tools available. Where compliance has not been achieved,
sanctions have been imposed. Recommended solutions to the challenges identified are tabulated inTable 5-2.
Table 5-2: Challenges faced by Burundi’s microfinance sector and recommended solutions
Challenge

Recommended solutions

1.

Poor corporate
governancex

Ensure the Act/Regulations have provisions that ensure good corporate
governance. If these do not already exist in the Act/Regulations, guidelines
can be issued in the meantime. The guidelines issued should be in line withrecommendations contained in the King III Report2.

Lack of institutional
capacityx

Institutional capacity can be improved by providing training. Moreover, themicrofinance association can be encouraged to provide training. If the
Association is not able to do it, there are a large number of (donor) agencies
that provide training directly or that provide funding for training/capacity
building25

3.

Poor MISx

The Central Bank can play a pivotal role in identifying MIS that can beutilised by the microfinance sector. If a large number of institutions arewilling to obtain/purchase the same software, large discounts can beobtained making the software more affordable to the MFIs. Poor MIS areoften the result of MFIs thinking that investing in a “good” MIS package
will be too costly. “Bulk” buying can help defray the cost26

4.

Inaccurate financial
statementsx

Enable MFIs to acquire MIS that are able to handle the activities andoperations of the MFIs and produce the relevant reports (see above)5.

Low capitalisationlevelsx

Sanctions will have to be imposed to ensure the defaulting MFI recapitalises
to meet the minimum capital requirement. This must be complied withmainly to protect depositors. If necessary, it may mean going as far as toclose the institution if the MFI is not recapitalised within a given timeframe.
This should only apply, however, to DT MFIs. For credit only MFIs, theconsiderations will be broader than just the capitalisation level in terms of
the action to be taken

25

The training held in December is one example of capacity building opportunities available.
Care has to be exercised with this option, however, because if the supervisors’ approach is too hands on,should the system fail, the question arises as to who is to blame? And whether MFIs could be sanctioned if the
failure is due to poor due diligence having been undertaken prior to acquisition.
26

42

5.2

THE COMOROS

5.2.1 Background
The Union of the Comoros, comprised of 4 islands with limited natural resources and connectivity to
the rest of the world, is emerging from a long period of political instability. Controversial elections in2007 led to military intervention by the African Union in March 2008. Political stability has since
improved following a referendum on constitutional amendments in May 2009 and the formation of aconsensus national unity cabinet in May 2010. Agricultural production dominates the economy,
accounting for 50% of GDP and employs 80% of the population, while the contribution from thesecondary sector remains limited, accounting for only 10% of GDP. The Comoros covers a land massof approximately 2,235m2 with a population of 781 thousand of which 50% are women.
Approximately 28% live in urban areas. The average population density is 395 people per square
metre with 60% living below the poverty line (2002 estimate). The literacy rate is estimated at 77.8%(73.7% women, 81.8% men). Real GDP growth rate was estimated at 3.3% for 2014 (3.5 % for 2013
and 3.0% for 2012). Remittances from about 200,000 Comorian Diaspora contribute about 25% of
the country’s GDP.
5.2.2 Access to finance
The Comoros has a relatively small and underdeveloped financial sector. Financial intermediationand credit to the private sector, while still low, have been increasing in recent years following theentry of two foreign commercial banks. Penetration rates are still very low and financial inclusion
remains an issue. Compared to the regional average, even mobile phone subscription is extremely
low at 14%. The system is dominated by bank and DT MFIs, while other aspects of the financial
sector, such as insurance, pensions, and capital markets, are almost nonexistent.
Four foreign owned banks and the state owned postal bank (SNPSF) account for about two thirds oftotal financial system assets and three MFIs for the remaining third. Private sector credit growth has
been brisk, but from a low base and credit has been extended mostly for consumption rather thaninvestment. While the banking system held considerable excess reserves at the end of 2013, these had
declined by the end of June 2014. A large part of the population still lacks access to finance. The
number of depositors with commercial banks per 1,000 adults was 92.06 while the number ofborrowers was 11.07 in 2013. The outstanding deposits and loans as a percentage of GDP were
11.11% and 9.83% respectively. The number of ATMs per 1000km2 was 13.97 and 6.27 per 100,000
adults in 2013.
In recent years, the authorities have undertaken several measures to improve financial intermediationand strengthen the country's banking and financial sectors. Such efforts include the facilitation ofentry of foreign banks, reforms to the investment code in 2007 and the establishment of a National
Agency for Investment Promotion. The country's authorities have recently concluded agreementswith the Central Bank of Tanzania, the Central African Banking Commission (COBAC) and theFrench prudential supervisory authority to strengthen regulatory and supervisory frameworks, expand
the scope of prudential regulations and increase the effectiveness of supervisory procedures.
5.2.3 The Comoros’ microfinance regulatory framework
The Comoros does have microfinance regulations, Decree No. 04-069/PR of 22 June 2004, which
regulates the activity of financial institutions. This was replaced by the Banking Act No. 13-003/AUof 12 June 2013. Regulations still have to be issued by the Central Bank to complement the new Act.
A total of eight credit institutions are licensed of which three are MFIs. Article 47 of the Banking Act
prescribes that the minimum share capital for each category of financial institution shall be
determined by the Central Bank. The draft Regulations27 drafted by the supervisory authority (i.e. the27

The draft Regulations became effective 1 January 2015.

43

Central Bank) have the following proposed provisions with respect to minimum capital requirements
for MFIs (Table 5-3).
Table 5-3: Minimum capital requirements for MFIs in Comoros
Institutional type

Minimum capital

Unions of decentralized financial institutions

500,000,000 Comorian Francs

MFIs affiliated to a network

50,000,000 Comorian Francs

MFIs not affiliated to a network

200,000,000 Comorian Francs

The same Regulations have the following proposed minimum capital requirements for banks and
NBFIs (Table 5-4):
Table 5-4: Minimum capital requirements for financial institutions in Comoros
Institutional type

Minimum capitalBanks

1 billion Comorian Francs

Specialized financial institutions

300 million Comorian Francs

Financial companies

300 million Comorian Francs

Financial intermediaries (e.g. payment, money-changer, etc.)

25 million Comorian Francs

MFIs are licensed to operate at national level and are permitted to have partnerships with foreign
financial institutions to facilitate transactions such as money transfers. Financial services that requireprior Central Bank approval are check issuance, currency exchange, the opening of an account abroadand overseas investment transactions.
MFIs are regulated and supervised in the same manner as other financial institutions. There are no
major differences with the exception of the minimum capital requirements. For instance, MFIs
require prior Central Bank approval before they can open a branch. MFIs are also supervised by thesame department within the Central Bank that supervises banks. There are no laws or regulations as
yet on mobile banking. Moreover, this service is not yet very common in the Comoros. Neither isthere a requirement for MFIs to report to a CRB.
5.2.4 Challenges faced by the Comoro’s microfinance sector
A number of challenges have been identified in the microfinance sector.
recommendations have been listed in Table 5-5.

The challenges andTable 5-5: Challenges faced by the Comoro’s microfinance sector and recommended solutions
Challenges

Recommended solutions

1.

The fee being charged to subscribe to theCredit Reference Bureau (CRB) is
considered to be on the high sidex

Perhaps the supervisory authority can negotiate with the
CRB so that it can reconsider its fees. Depending on thefee structure that currently exists, it may be possible for
the CRB to have a different fees and charges for thedifferent types of financial institutions

2.

Biometric national identification cards
have been introduced but only a limited
number have been issued. The biometriccards are now the only accepted form ofidentificationx

The authorities should reconsider the nullification ofprevious forms of identification until the majority ofpeople have been issued with the new biometricidentification cards

44

Challenges

Recommended solutions

3.

The tax exemptions previously availed tofinancial institutions are no longer
available since the enactment of the newLawx

The supervisory authority should engage with theTreasury/Ministry of Finance to reconsider theprovisions regarding tax exemptions in order to lower
the costs of financial institutions and encourage
investment in the sector

4.

Financial institutions have been given one
year to comply with the new Law. This
length of time is considered insufficientx

It may be necessary to lengthen the time for MFIs tocomply with the new legal requirements if the strict
enforcement of the new Law has a negative impact on
the operations of MFIs, i.e. an impact assessment needs
to be undertaken to make an informed/evidence based
decision

5.3

THE DRC5.3.1 Background
The DRC, a country located in central Africa and endowed with vast natural resource wealth, covers aland mass of approximately 2,344,900 square kilometres. The DRC has a population of 79.4 millionof which an estimated 50% are women. The average population density is 30 people per square metrewith 42.5% living in urban areas and 63% living below the poverty line (2012 estimate). The literacy
rate is estimated at 63.8% (50% women, 78.1% men). The DRC is slowly recovering from nearly two
decades of civil conflict which had led to the collapse of economic activity. The country’s
infrastructure, destroyed during the war, is underdeveloped and plagued with bottlenecks. Since 2001,
the government has undertaken economic, financial and structural reform programmes aimed atstabilising the macroeconomic situation and establishing a climate favourable to private sector led
development. As a result, the DRC has achieved solid growth rates. Much economic activity still
occurs in the informal sector and is not reflected in GDP data. Agriculture accounts for a significant
proportion of GDP and employs the greatest part of the labour force. The Country marked its twelfth
consecutive year of positive economic growth in 2014. Real GDP growth rate was estimated at 9.1%
for 2014 (8.5 % for 2013 and 7.2% for 2012).
5.3.2 Access to finance
The DRC has one of the world’s lowest bank penetration rates. Retail banking is largely undeveloped
and most banks act as financial agents for the government or extend credit to international institutions
operating in the Country. Foreign commercial banks dominate the industry as providers of funding
for the mining and petroleum sectors. Access to banking services for both entrepreneurs and retailcustomers is very limited and frequently restricted to the very wealthy. The number of depositorswith commercial banks per 1,000 adults was 55.93 while the number of borrowers was 6.11. The
outstanding deposits and loans as a percentage of GDP were 17.8% and 10.36% respectively. The
number of ATMs per 1000km2 was 0.12 and 0.77 per 100,000 adults. The number of commercialbank branches per 1,000km2 was 0.11 and 0.69 branches per 100,000 adults. Authorities recently
embarked on several financial sector reform processes to strengthen supervision of the banking sector
and reinforce compliance with prudential regulations.
5.3.3 The DRC’s microfinance regulatory framework
The DRC does have a legislative framework for the microfinance sector. The sector is governed by
the following laws:x28

Law No. 003/200228 which provides the legislative framework for credit institutions;

Effective 2 February 2002.

45

x

Law No. 002/200229 which provides the legislative framework for SACCOs; andx

Law No. 11/02030 which governs microfinance activity in the DRC.

The Central Bank of Congo (BCC) is responsible for regulating and supervising the microfinancesector as mandated by Law No.005/2002 31 which it does through the Microfinance Supervision
Division. This Division is housed in the department that supervises banks. MFIs are subject to offsite
monitoring and onsite inspections.
To foster the smooth functioning of the microfinance sector, the BCC issued 10 Directives which
SACCOs and MFIs are expected to adhere to. The areas covered by the Directives are listed in Box
5-1.
Box 5-1: Areas covered by the Directives issued by the BCC for the microfinance sector
Directives issued by the BCC cover:xPrudential regulationsx

The provisioning and classification of loansxPerformance indicatorsx

Deposit mobilisationx

Financial statements and reportingx

Governancex

Internal controlsx

Submission of periodic returnsxMinimum capital requirements

There are broadly two types of MFIs in the DRC. These are SACCOs which have a social objective
and only cater to their members and MFIs which have a profit motive and provide financial services
to the general public. To date, 120 MFIs have been licensed of which 98 are SACCOs, two central
SACCOs and 20 MFIs located in all parts of the country. MFIs are permitted to operate at national
level. The minimum capital requirement for MFIs is USD100,000 for microcredit enterprises and
USD350,000 for microfinance companies, whereas the minimum capital requirement for commercial
banks is USD10 million. MFIs are not permitted to offer cheque accounts as a service and foreignexchange transactions require prior approval from the Central Bank. There are no differences in the
branch opening requirements for MFIs. MFIs are required to meet the same criteria as other financial
institutions. There are no regulations for agency banking, neither are there any regulations for mobilebanking. In spite of the lack of regulations, MFIs do provide mobile banking services. There is norequirement as yet for MFIs to report to a CRB.
Supervision – offsite monitoring
This principally involves the review of documents submitted to the Central Bank on a periodic basis.
The BCC has adopted Risk Based Supervision (RBS) and the monitoring and inspections are
conducted in accordance with the principles of RBS. The review of these documents facilitates
ensuring compliance with regulatory provisions; follow up, where applicable, of matters raised froman onsite inspection and the collection of data and information for monitoring both at the institutional
and industry level of the microfinance sector. The BCC makes use of the software “FinA” which was
acquired with donor funding and technical assistance from The United States Agency for International
Development (USAID). The software makes it possible for MFIs to submit data/information to theCentral Bank electronically and highlights corrections that institutions may be required to make where
29

Effective 2 February 2002.
Effective 15 September 2011.
31
This is the Central Bank Law which became effective 7 May 2002.
30

46

data/information may be incorrect or incomplete. The software also produces reports and makes it
possible for supervisors to focus on the analysis rather than data input.
Rating of MFIs
To strengthen the supervision of MFIs, the DISF/CP has developed, with the assistance of Planet
Rating, a categorisation of MFIs in the DRC according to their risk profiles. This categorisation
allows the BCC to focus its supervisory resources on the institutions that pose the greatest risk to thesmooth functioning of the microfinance sector and consequently the financial sector.
5.3.4 Challenges faced by the DRC’s microfinance sector
The challenges faced by the DRC’s microfinance sector were identified as follows:
1) With respect to offsite reporting – the production of inaccurate financial statements, the latesubmission of financial statements, the non submission of reports, the absence of supervisors insome parts of the country the costs related to the certification of financial statements and theinadequate number of supervisors.
2) With respect to onsite inspections - the high costs of onsite inspections (i.e. deployment of thesupervisors), the inaccessibility of some MFIs due to the poor state of the roads, the insecurity insome parts of the country and the inadequate number of supervisors (Table 5-6).
The DRC participants at the training highlighted the following for consideration going forward.
x

The promulgation of consumer protection laws and regulations;x

The promulgation of agency banking laws and regulations;x

The modernisation of the MFIs risk management system;x

The implementation of a deposit guarantee scheme; andx

The elaboration of financial inclusion initiatives within the Country’s national strategies andpolicies.

Table 5-6: Challenges faced by the DRC’s microfinance sector and recommended solutions
Challenges

Recommended solutions

With respect to offsite reporting1.

Non reliable financial statementsx

Depending on the reasons as to why the financial statements areinaccurate, the supervisor may have to insist that MFIs employ“qualified” personnel (accountants) to prepare the books. The
finance officer must be “approved” by the BCC before they are
employed2.

The late submission of financial
statementsx

Due to the poor infrastructure, the BCC may need to consider
whether the timeframes for submission are realistic given theircontext. If the timeframes are reasonable, then MFIs will haveto be penalised in order to get them to comply. If the Laws do
not provide for sanctions, then the Laws will need to be revised
to allow the BCC to apply administrative sanctions whereappropriate

3.

The non submission of reportsx

As for late submissions, the cause of the non submission needs
to be determined. The recommended solutions will be the sameas those given for the late submission of financial statements

47

Challenges

Recommended solutions

4.

The absence of supervisors in someparts of the countryxMore supervisors will have to be employed. This may becontingent, however, on the availability of the right “calibre” ofindividuals being available to work in those parts of thecountry. This may require an “inducement” to be included in
the salary package to incentivise individuals to work in theseparts of the country. The BCC will have to provide theresources needed to make this a possibility

5.

The inadequate number ofsupervisorsx

As for point number 4, more supervisors will have to be
employed6.

The costs related to the certification(audit) of financial statementsxDiscussion to be continued

With respect to onsite inspections
7.

The costs of onsite inspections (i.e.
deployment of the supervisors) ishighx

As the BCC has adopted RBS, this should enable the Central
Bank to deploy its resources that maximises the efficient andeffective use of its resources. So the decision to conduct anonsite inspection should depend on the risks associated if anonsite inspection was not carried out for a particular MFI

8.

The inaccessibility of some MFIs
due to the poor state of the roadsxThis is beyond the scope of the regulators/supervisors to deal
with

9.

The insecurity in some parts of thecountryx

As for 8 above. In addition to considerations of the supervisors’
safety, as for 7 above, the decision to conduct inspections inconflict areas should depend on the risks associated if onsite
inspections of MFIs located in those areas are not carried outx

As for point number 4, more supervisors will have to be
employed

10. The inadequate number ofsupervisors

5.4

EGYPT

5.4.1 BackgroundOccupying the northeast corner of the African continent, Egypt covers a land mass of approximately
1,001,500 square kilometres. Egypt has a population of 88.5 million of which an estimated 50% are
women. The average population density is 82 people per square metre with 43.1% living in urban
areas and 25.2% living below the poverty line (2011 estimate). The literacy rate is estimated at 73.8%(65.4% women, 82.2% men). Poor living conditions and limited job opportunities for the average
Egyptian contributed to public discontent, a major factor leading to the January 2011 revolution that
ousted Hosni Mubarak. The uncertain political, security, and policy environment since 2011 caused
economic growth to slow significantly, hurting tourism, manufacturing, and other sectors and pushingup unemployment. Real GDP growth rate was estimated at 2.2% for 2014 (2.1 % for 2013 and 2.2%
for 2012).
5.4.2 Access to financeEgypt's financial sector is underdeveloped and is a serious bottleneck for economic development andjob creation. Financial intermediation by the banking system is relatively low by international
standards, with major banks preferring to service large companies and the Government, rather thanSMEs. Consequently, a large part of the population still lacks access to finance. The number ofdepositors with commercial banks per 1,000 adults was 459.51 while the number of borrowers was
133.8. The outstanding deposits and loans as a percentage of GDP were 70.64% and 31.43%

48

respectively. The number of ATMs per 1000km2 was 6.52 and 11.69 per 100,000 adults. The
number of commercial bank branches per 1,000km2 was 2.72 and 4.87 branches per 100,000 adults.
There are 450 NGOs that provide microfinancial services in Egypt. The financial service offered,however, is mainly microcredit. Most of the microfinance initiatives, namely the financing ofworking capital, are donor driven initiatives aimed at helping existing microenterprises with theirshort term financial needs. Savings and deposits are mostly provided by “formal” financial services(i.e. banks and licensed insurance companies). Credit guarantee facilities, which enable MFIs toleverage funds from banks, have only been offered to a handful of NGOs, primarily through theCredit Guarantee Company.
5.4.3 Egypt’s microfinance regulatory framework
Different authorities are responsible for regulating and supervising MFIs, depending on the legal
identity of the MFI. The Central Bank of Egypt (CBE) is the (prudential) regulator of public andprivate banks and the Ministry of Social Solidarity (MSS) is the regulator of NGO MFIs. The Social
Fund for Development (SFD) is the coordinating and planning body for MFIs as designated by theLaw. MFIs wishing to capture savings and or other deposits should be duly incorporated as a formal
financial institution (a bank).
The activities of NGOs, including financial service activities, are governed by Egypt’s NGO Law 84
of 2002, which requires that NGOs operate as not-for-profit associations, foundations or unions. All
NGOs must register with the MSS before providing services. NGO MFIs are permitted by law tooffer loans to SMEs under the title of “activities to enhance the economic status of targetedcommunity”.
The Non Bank Microfinance Companies Law was recently enacted. Four hundred and fifty
microfinance companies have been registered. The minimum capital requirement for microfinancecompanies is LE5 million (approximately USD700). The minimum capital requirement forcommercial banks is USD7 million. MFIs are permitted to operate at national level. They areprohibited, however, from providing savings, remittance and insurance products. Branch opening
requirements, especially with respect to security, are more relaxed than those for commercial banks as
MFIs are not permitted to accept deposits. There are some differences in the supervisory tools used,
the most notable being the requirements with regard to legal reserves and provisions for bad debts tocomply with microfinance best practices (i.e. PAR>90 days should be 100% provisioned).
No regulations have been issued for agency banking. Likewise, there are no regulations for mobilebanking either. At the moment, MFIs are not required to report to a CRB but they will soon berequired to do so under the new MFI law.
5.4.4 Supervision of NGO MFIs
The Egyptian Financial Supervisory Authority (EFSA) is responsible for supervising nonbank
financial activities. As stated earlier, the MSS oversees NGO MFIs. The MSS is permitted to inspect
and audit the NGO’s books and records. The MSS may also attend NGO MFIs general assembly
meetings and extraordinary meetings of the board of directors, as well as retain copies of the minutes.
Furthermore, NGO MFIs are required to submit copies of board minutes and audited financial
statements to the MSS.
5.4.5 Challenges faced by Egypt’s microfinance sector
The challenges faced by the a microfinance industry as presented by the training participants from
Egypt were (1) the statutory requirement for NGO MFIs to have all cheques for loan disbursements
signed by the board chairman (or a delegate thereof) and the treasurer and (2) the prohibition oflenders charging interest rates above those prescribed by the Civil Code. Under the Central Bank law,
this restriction does not apply to banks but there is no such exemption, however, for NGO MFIs.
While it has not been a significant problem in practice, in some cases, NGO MFI clients facing legal

49

action for the non repayment of their loans have counterclaimed stating that interest rates charged by
the NGO MFIs violate the Civil Code.
5.4.6 Recommended interventions
The training participants from Egypt recommended a number of interventions to improve theperformance of the microfinance sector. These recommendations include the following:x

Encouraging adherence to reporting standards and performance benchmarks to improvetransparency in the industry and professional standards, and ultimately, its legitimacy;x

Establishing clear and unified criteria for financing MFIs - institutions that provide capital to
MFIs should establish standardised financing criteria that are based on microfinance bestpractices;x

Establishing an independent, member driven and self regulatory organization (SRO) to enhance
the sector’s development through the implementation of non-prudential regulations and ensuring
MFIs’ compliance with prescribed performance standards;

x

Recognising NGO MFIs as a distinct type of NGO;x

Requiring the active and proper governance by NGO MFI boards;x

Allowing NGO MFIs to use their assets (including active portfolios) as security for funding;x

Allowing NGO MFIs to offer credit, seize collateral in the case of default and enforce loan
contracts;x

Allowing NGO MFIs to access information from, as well as provide information to, the recently
established private sector credit bureau (for NGOs extending loans larger than EGP30,000); andx

Exempting NGO MFIs from certain accounting and auditing provisions governing NGO MFIs,
and grant them the right to receive funds and charge market rates of interest.

5.5

ETHIOPIA

5.5.1 Background
Ethiopia, located in the Horn of Africa, covers a land mass of one million square kilometres. It has apopulation of 99.5 million of which an estimated 50% are women. The average population density is
94 people per square metre with 19.5% living in urban areas and 39.0% living below the poverty line
(2012 estimate). The literacy rate is estimated at 49.1% (41.1% women, 57.2% men). While GDP
growth has been high, per capita income is among the lowest in the world. Ethiopia has achieved
high single digit growth rates through Government led infrastructure expansion and commercial
agriculture development. Real GDP growth rate was estimated at 10.3% for 2014 (9.8% for 2013 and8.7% for 2012).
5.5.2 Access to financeEthiopia's financial system is small and largely dominated by the State. Public banks account for 67%
of total deposits and 55% of loans and advances. Government dominates lending, controls interest
rates and owns the largest bank, the Commercial Bank of Ethiopia (CBE), whose assets represent
about 70% of the sector total as of April 2012. The Central Bank, the National Bank of Ethiopia(NBE), has a monopoly on all foreign exchange transactions and supervises all foreign exchange
payments and remittances.
The number of depositors with commercial banks per 1,000 adults was 333.28 while the number ofborrowers was 14.67. The outstanding deposits and loans as a percentage of GDP were 19.85% and15.22% respectively. The number of ATMs per 1000km2 was 13.54 and 5.16 per 100,000 adults.
The number of commercial bank branches per 1,000km2 was 15.69 and 5.98 branches per 100,000

50adults. The number of active mobile money accounts per 1,000 adults was 262.54 and the value ofmobile money transactions was 7.57% of GDP.
Mobile banking is an underserved sector with strong growth potential. Low cell phone penetration
has prevented the rapid development of mobile banking which has taken place elsewhere in Africa.
However, the mobile phone industry has just started to discover Ethiopia as a relatively large,
untapped market. A number of operators are thus preparing to launch, or have already launched,payment and transaction systems supported by mobile technology.
Microfinance landscape/financial landscape
There are 18 commercial banks in Ethiopia with 2,754 branches and sub-branches (June 2015), 35
MFIs with 1,567 branches/sub-branches (June 2015), one development bank with 32 branches acrossthe country; 14,453 primary SACCOs with 1,736,122 members (676,237 (38.95%) women) and 2,745
unions; 5 lease finance companies and numerous informal financial service providers.
MFIs have over 3.76 million active borrowers, 41% of which are women. The outstanding loanbalance was ETB16.8 billion (approximately USD840 million) and savings of ETB11.8 billion(approximately USD585 million). MFIs have ETB5.6 billion (approximately USD280 million) andETB24.5 billion (approximately USD1.2 billion) in capital and assets respectively.
Box 5-2: MFI products
Loan products

Savings productsxAgricultural loansxCompulsory savingsx

Micro & small enterprise loansxVoluntary savingsx

Housing loansxTime deposits

x

Equipment leasing loansx

Regular savingsx

Loans for trade activities

xChild savingsx

Consumption loansxInstitutional savingsx

Loan for service activities

Leasing ProductsxMicro insurance products

Machinery and equipment

Other products

Money transfers

e.g. Paying pensioners

MFI loan sizes range between ETB5,000 and ETB10 million (approximately USD500,000). MFIs are
permitted by law to lend up to 1% of their capital for individual loans and 4% for group loans withgroup guarantees.
The microfinance network
The main responsibilities of the Network are to support the creation of an enabling policy andregulatory environment through the consultative process and building of capacity of MFIs and otherinclusive finance providers. The Network has also established the Ethiopian Inclusive Finance andTraining and Research Institute (EIFTRI) whose mandate is to: create forums to discuss the criticalissues of inclusive finance providers, to monitor financial and social performance, promote inclusive
finance in Ethiopia, including innovations in the industry, research and knowledge management.
5.5.3 Ethiopia’s microfinance regulatory framework
The credit scheme was started in Ethiopia in the late 1980s as part of NGO relief and development
programmes. The Proclamation for the licensing and supervision of microfinance businesses was
issued in 1996 to separate charity from finance. NGOs were prohibited from delivering finance. This51

Proclamation (the Microfinance Regulations) was revised in 2009 (Proclamation 626 of 2009). MFIs
are allowed by law to mobilise public savings. Microfinance is used as a tool by the Government toimplement development policies and programmes.
To date, 35 MFIs have been licensed by the NBE. The minimum capital requirement for MFIs is
ETB10 million 32 , for commercial banks it is ETB500 million. All licensed MFIs can operate at
national level. MFIs are not part of the payment system, so although a cheque account may be opened,
these cheques can only be used internally for the MFI issuing them. MFIs are not allowed to carry out
foreign exchange transactions.
In contrast to banks which have to get prior NBE approval and follow strict branch opening
specifications, MFIs are only required to notify the NBE that they are opening a branch. The
supervisory tool used by the NBE for MFIs and banks is RBS. MFIs are subjected to offsite
monitoring and onsite inspections. In 2004, a separate department for the supervision of MFIs wasestablished and upgraded to directorate level in 2009. Prior to 2004, the supervision of MFIs wasdone by the same department that supervises banks. The MFI supervision department has two wings;(1) policy and licensing and (2) supervision, both of which are headed by principal examiners.
There are regulations for both agency and mobile banking. MFIs are permitted to have agents.
Although there is a CRB, MFIs are not yet obliged to report to the CRB due to capacity constraints.
Current MFI MIS are not able to support the system.
The main laws regulating the microfinance sector are the Commercial Code, the Proclamation for
Banking and Microfinance Business and supporting directives issued by NBE. The provisions coverpreventive measures (pre-crisis measures/actions that can be taken by the NBE). Ongoing provisions
cover capital adequacy, liquidity, loan portfolio classification and provisioning, lending limits,
branching requirements, frequency and contents of reporting, external audit reports, restrictions on
investment and taxation.
5.5.4 Challenges faced by Ethiopia’s microfinance sector
The challenges in the microfinance sector have been summarised in Table 5-7 together withrecommended solutions.
Table 5-7: Challenges faced by Ethiopia’s microfinance sector and recommended solutions
Challenges to microfinancedevelopment

Recommended solutions

1.

Unmet demandxIncrease outreach by increasing capital2.

Lack of loan capital(inaccessibility of foreign
capital)xOpen up ownershipx

Provision of wholesale funding

3.

Limited capacity for MFIs/lackof skilled personnelx

For further discussion

4.

Limited services to pastoralists

xGreater use of technology, specifically digital financial services/mobile phone banking

xGreater use of agency banking

32

Effective January 2015. It was ETB2 million at the time of the workshop.

52

Challenges to microfinancedevelopment

Recommended solutions

5.

x

Greater use of technology, specifically digital financial services/mobile phone banking

xGreater use of agency bankingx

Focused policies to increase the provision of financial services inareas where provision levels are low

Uneven coverage andpenetration in different regions

6.

Limited products andinnovationsxMore private/foreign ownership required/allowed

7.

Poor levels of financial
literacyx

Improve levels of literacy through a national literacy programme(which might be part of a financial sector development programme)

8.

Poor governancex

Introduction of governance laws/guidelines

9.

Limited donor support

x

Revise laws to permit international donor support

10. Low capital requirements has
led to weak MFIsx

Revise capital requirements (but this must be done with care anddone in consideration with other things that have led to weak MFIs)

11. Low levels of women
accessing financial servicesx

Have explicit policies that address the issue of increasing women’s
financial inclusion

5.6

KENYA

5.6.1 Background
Kenya is the economic and transport hub of East Africa. It has a surface area of 580,400 square
kilometres and a population of 55 million of which an estimated 50% are women. The average
population density is 78 people per square metre with 25.6% living in urban areas. With per capita
income of USD1,300, Kenya ranks as a low middle income country. Agriculture remains the
backbone of the Kenyan economy, contributing 25% of GDP. About 80% of Kenya’s population
work part time in the agricultural sector. An estimated 43.4% live below the poverty line (2012estimate). The literacy rate is estimated at 78% (74.9% women, 81.1% men). Kenya’s real GDP
growth has averaged 5% for the past several years. Real GDP growth rate was estimated at 5.3% for2014 (5.7% for 2013 and 4.5% for 2012).
5.6.2 Access to financeKenya's financial system is relatively well developed and sound. The major elements of a welldeveloped financial system have been put in place, including the creation of the first CRB in 2010.
Credit has grown rapidly in recent years, but the financial sector has still been unable to reach its fullpotential in supporting the allocation of economic resources across the economy. Initiatives taken by
the Government to improve access to finance include the Women Fund, the Youth Fund and the
Uwezo Fund. The Government (and Government agencies) have set aside 30% of contracts for
women and the youth.
The number of deposit accounts with commercial banks per 1,000 adults was 876.07. The
outstanding deposits and loans as a percentage of GDP were 44.48% and 40.95% respectively. The
number of ATMs per 1000km2 was 4.37 and 9.99 per 100,000 adults. The number of commercialbank branches per 1,000km2 was 2.43 and 5.57 branches per 100,000 adults. The number of active
mobile money accounts per 1,000 adults was 1,017.76 and the value of mobile money transactions
was 55.28% of GDP. Kenya is a world leader in mobile banking. Its landmark M-Pesa platform, a53

service offered through partnership between Safaricom and Vodafone, allows a range of services suchas money transfer, cash-flow management and banking options through mobile phones.
5.6.3 Kenya’s microfinance regulatory framework
Kenya’s law covering microfinance, the Microfinance Act, was enacted in 2006. The key features of
the Act are highlighted in Box 5-3 and the regulations issued under the Act are listed in Box 5-4.
Although there is no specific law or regulations that deal with mobile banking, the regulation ofmobile banking predominately falls within the scope of the National Payments Systems Act andaccompanying regulations.
Box 5-3: Key features of the Kenyan Microfinance Law
Governance & Ownershipx

Limits on shares – 25% per personxProvisions (25% limit) shall not apply to:o A wholly-owned subsidiary of a bank or financial institutiono Any company exempted by the Minister on the recommendation of Central bank of Kenya (CBK)x

No person shall transfer more than 10% of the shares

Governancex

Vetting of Senior officers (senior management board members)x

Adequate board oversight, with two mandatory committees, the Board Audit and Credit CommitteesxAssets & Liabilities Committee (ALCO) is a mandatory management committeex

Key control functions to be in place (internal audit, external audit and risk management)

Capitalx

There are two categories of microfinance banks (MFBs) licensed by CBKo Nationwide - minimum capital is KShs. 60 million (US$674,157)
o Community - minimum capital is KShs. 20 million (US$224,719)
Note: credit only MFIs are not supervised by CBKCredit Riskx

The regulatory framework provides for limits on:o Insider lending limited to 2% of core capital for a single borrower and 20% for insiders combinedo Single borrower (includes associates) limited to 5% of core capitalo 70% of loan portfolio must be microfinance loanso Large exposures between 2% & 5% of core capital should not exceed 30% of total loan portfolio.

x

All loans to directors must be approved by the board and reported to CBK within 14 days.

Powers of the Central Bankx

Inspectx

Receive informationx

Issue directives and administrative sanctions for noncompliancex

Prompt corrective action

A microfinance loan is =< 2% of core capital54

Box 5-4: Regulations and guidelines issued under the Microfinance Act
xMicrofinance Act, 2006;

x

The Microfinance (Categorization of Deposit Taking MFIs) Regulations, 2008;

x

The Microfinance (Deposit Taking MFIs) Regulations, 2008;

x

The Microfinance (Deposit Taking Microfinance Deposit Protection Fund) Regulations, 2009;x

The Microfinance (Deposit Taking MFIs Administrative Sanctions and Penalties) Regulations, 2009;x

Guideline on Operation of Third Party Agents;x

Guideline on Operation of Agencies and Marketing Units;x

Credit Reference Bureau Regulations 2013 (full file reporting from February 2014).

Since the Microfinance Act came into effect, nine MFBs have been licensed to date and there are
more than 5,000 MFIs under non-prudential regulation. There are two categories of MFBs licensed
by the Central Bank of Kenya (CBK), nationwide MFBs and community MFBs. The minimum
capital requirement differs for each type; KShs60 million (USD674,157) for nationwide MFBs andKShs20 million (USD224,719) for community MFBs. The minimum capital requirement forcommercial banks and NBFIs is KShs1 billion (USD11.2 million). Table 5-8 lists the different typesof financial institutions in the financial sector.
Table 5-8: Financial institutions in the Kenyan financial sector
Institutional type

NumberRegulator

Commercial Banks

43

Central Bank of Kenya (CBK)Foreign Exchange Bureaus

94

CBK

Mortgage Finance Institutions

1

CBK

DT MFIs9CBK

NDT MFIs

Numerous

MFIs

MOF in the process of finding the best way forward

CRBs

2

CBK

Licensed DT SACCOs

184

SACCO Societies Regulatory Authority (SASRA)NDT SACCOs

1,99533

Ministry of Industrialisation

MFIs are prohibited from engaging in a number of activities. These are trust operations, wholesale orretail trade, investing in enterprise capital, the underwriting or placement of securities, purchasing orotherwise acquiring any land except as may be reasonably necessary for the purpose of expending thedeposit taking business and or any other activity that the CBK may prescribe.
Branch requirements do not differ for MFIs from that of other financial institutions, other thanproviding for cheaper places of operation through the use of deposit taking marketing units and third
party agents (as provided for in the prudential guidelines). There is no difference in the supervisory
tools used for MFIs. The tools are the same as those for banks and other financial institutions. Offsite
and onsite surveillance applies to MFIs. With effect from February 2014, MFIs are required to reportto the CRBs.

33

Estimated 2013 figure.

55

The training participants from Kenya highlighted a number of aspects of the legislative framework
worth noting. These included:x

The Guidelines that provide for cheaper places of business (through the use of DT marketing units
and third party agents);x

The National Payments Act and Regulations which cover the operations of payment systems,
including mobile financial services;x

Full file reporting to the two licensed CRBs which results in the building of information capital;x

Deposit insurance for all clients of CBK licensed DT financial institutions up to a limit ofKShs100,000 (USD1,100); andx

The SACCO Societies Act of 2012 which covers all DT SACCOs (of which there areapproximately 215 SACCOs that account for 78% of total assets and 77% of total deposits and184 have been licensed).

5.6.4 Challenges faced by Kenya’s microfinance sector
In regulating and supervising the microfinance sector, a number of challenges have been identified
that affect the development of this sector. The challenges cover balancing the requirements ofprudential oversight and enabling financial inclusion (particularly of women and the youth), poor
corporate governance and ensuring the legislative framework keeps up with innovations in the market.
Table 5-9: Challenges faced by Kenya’s microfinance sector and recommended solutions
Challenges

Recommended solutions

1.

x

Carrying out regulatory impact assessments when developing
policy and regulations

Balancing prudent legal frameworkand enabling financial inclusion x

Places of businessx

Information systemsx

Capacity - staffing

2.

Corporate governance - board
experience for young MFIsx

Prior to their appointment, the vetting of proposed board
members and senior officials and obtaining theregulators’/supervisors’ prior approval

3.

Innovations not covered by existinglawsxMonitoring developments in the microfinance sector anddetermining as best as possible when would be the best time
to develop and introduce “appropriate” laws/regulations,being careful not develop/introduce provisions that would
stifle innovations in the sector

5.6.5 Mobile Phone Financial Services (MFS) – beyond transfers
MFS in Kenya's banking sector
The development of linkages and the integration of mobile payment platforms with financial
institutions in the delivery of financial services have made the delivery of financial services more cost
efficient and increased accessibility to financial services. Examples of the services and products thathave since been developed include M-Kesho, Pesa-Pap, KCB connect, Faulu Popote and M-Shwari.

56

MFS: Critical success factors
The critical success factors identified in the MFS sector are listed below:xPartnerships between financial institutions and MNOs - leveraging on core competencies –
telecommunication companies’ core competency of voice and data transmission and financial
institution’s competencies in the provision of financial services;x

Coordination and information sharing amongst regulators;x

Dialogue between the private sector and regulators to enable regulators to understand businessmodels and value propositions for the private sector; and for the private sector to understand therationale for regulation;x

Government as a partner in MFS systems to support business models; andxConsumer adaption – Master Card Survey, 2012.

Beyond payments: second generation MFS
Where the regulators have provided a conducive regulatory environment, e.g. by developing smart
policies and regulations that provide appropriate incentives that encourage the private sector to drive
business interests and scale up MFS, MFS have progressed quickly to offer additional services beyond
person-to-person (P2P) payment services, including business-to-person (B2P) and business-tobusiness (B2B) payments, credit, savings, insurance, agent banking and other financial services suchas credit history information. The transition from person-to-person (P2P) to second generation MFS
has also been market led and symbiotic where there has been an attractive business value proposition.
The advancement of MFS to second-generation MFS beyond payments is critical in the modernisingof payments systems and deepening of financial systems.
Agency banking was introduced in 2010 which has resulted in an increase in financial inclusion in
unserved and underserved areas of Kenya. MBFs have increased significantly since March 2007, thus
narrowing the financial infrastructure gap where costs of distance and time are very high for formalbanking services, facilitating trade by making the transfer of funds across large distances muchcheaper, providing a safe storage mechanism (i.e. a platform for the transfer of payments, savings andcredit) and improving the availability of market information. These improvements/developments areevidenced by the numbers as shown in the following subsection and Table 5-10. Financial accesssurveys in the last 8 years show improvements.
Table 5-10: MFBs outreach indicators showing access of the poorer segments of the economy
Indicator

September

June

June

2012

2013

2014

Total banks granted agency network approvals

10

13

15

Total DT MFIs granted agency network approvals

0

1

1

Total number of specific agents appointed

14,16819,64926,750

Number of transactions by agents since May 2010 (m)

24.7

58.65

106.1

Value of transactions by agents since May 2010 (Ksh bn)

144.2

310.5

571.5

57

Achievements from April 2007 to June 2014
The training participants from Kenya highlighted a number of achievements from April 2007 to June
2014. These are listed below:x

Mobile phone money transactions were valued at an average of Ksh6.3 billion per day (4.6% ofannual GDP) in June 2014 compared to Ksh0.22 billion (0.01% of GDP) in April 2007;x

The number of mobile phone money customers increased from 0.05 million in April 2007 to 25.9
million in June 2014;x

The number of deposit accounts increased from 2.55 million in 2005 to 27.4 million at the end ofJune 2014. The takeoff (dominated by small accounts) seems to have started in 2007;x

The number of micro accounts (below Ksh100,000) increased from approximately 2.14 million
accounts in 2005 to 26.33 million accounts at the end of June 2014. These are covered by the
Kenya Deposit Insurance Corporation (KDIC);x

The growth is attributable to the reduced costs of maintaining micro accounts and the introductionof innovative instruments in the financial market;xIncreased branch outlets have solved the disadvantages of physical distances; andxBarriers to entry and opening/maintaining accounts have been reduced significantly.

The number of loan accounts has increased from 0.6 million in December 2005 to 3.8 million in June2014.
x2013 - 2014 acceleration is noticeable: the new mobile phone savings accounts modalities e.g. MShwari platform.

x

M-Shwari platform increased loan accounts from 13,000 in 2011 to 897,242 at the end of 2013
and further to 1,399,114 in June 2014.

5.7

MADAGASCAR

5.7.1 Background
Madagascar is an island country in the Indian Ocean, off the coast of Southeast Africa. The nation iscomprised of the island of Madagascar, the fourth largest island in the world, as well as numerous
smaller peripheral islands. It has a land mass of 581,000 square kilometres. It has a population of
23.8 million of which an estimated 50% are women. The average population density is 39 people persquare metre with 35.1% living in urban areas and 50% living below the poverty line (2004 estimate).
The literacy rate is estimated at 64.7% (66.7% women, 62.6% men). Agriculture, including fishingand forestry, is a mainstay of the economy, accounting for more than one fourth of GDP and
employing approximately 80% of the population. Deforestation and erosion, aggravated by
the use of firewood as the primary source of fuel, are serious concerns. Real GDP growth rate
was estimated at 3% for 2014 (2.4% for 2013 and 3% for 2012).
5.7.2 Access to finance
The financial system is shallow and has so far fallen short of catalysing funds for growth.
Madagascar's financial sector is dominated by banks, the assets of which amount to 25% of GDP.
Commercial banks hold 84% of total financial sector assets but only offer basic savings and credit

58

products to a select clientele. Domestic credit to GDP ratio remains low, and the economy remains
largely cash based. Access to credit is expensive and limited, especially for SMEs, and capital
markets are undeveloped and hampered by relatively high interest rates.
The number of depositors with commercial banks per 1,000 adults was 71.48 while the number ofborrowers was 24.89. The outstanding deposits and loans as a percentage of GDP were 18.47% and10.72% respectively. The number of ATMs per 1000km2 was 0.41 and 1.86 per 100,000 adults. The
number of commercial bank branches per 1,000km2 was 0.38 and 1.74 branches per 100,000 adults.
The number of active mobile money accounts per 1,000 adults was 11.11 and the value of mobile
money transactions was 1.52% of GDP.
5.7.3 Madagascar’s microfinance regulatory framework
Madagascar does have Microfinance Regulations. One of the objectives of the Regulations was toprofessionalise the sector and lower the level of informality. The previous law, Law No. 96_020 did
not take into account non-mutualistic MFIs, it only included mutualistic MFIs. In the new law, Law
No. 2005_016, MFIs are classified into 3 categories (as shown in Table 5-11); MFI 1, MFI 2 and MFI
3, with the size and complexity of the MFIs varying depending on which category the MFI falls into.
To date, 27 MFIs 34 have been licensed by the Bank and Financial Supervisory Commission(CSBF). All credit institutions (banks and MFIs) are supervised by the CSBF under Act No.
95_030 relating to the activities and monitoring of credit institutions. Licensed MFIs have 705
access points 35 and 730,761 clients. The outstanding credit balance was MGA239 million(approximately USD103 million) and an outstanding deposit balance of MGA195 million(approximately USD85 million). MFIs have been divided into different categories with each category
having a different minimum capital requirement (Table 5-11).
Table 5-11: MFI categories in Madagascar and minimum capital requirements
MFI category

Minimum capital requirement
(MGA)
None

MFI 1
Mutual MFI 2 forming a network
Mutual Basic MFI

15,000,000

Union

60,000,000

Federation

100,000,000

Mutual MFI 2 not forming a network

15 million

NDT Non-mutual MFI 2 incorporated as a limited company

60m

NDT Non-mutual MFI 2 incorporated as a corporation

100 m

DT Non-mutual MFI 2 incorporated as a corporation

200m

34
ACEP Madagascar, Apem Paiq, CECAM, CEFOR, EAM Finance , Fanampiana Ivoarana, Hardi Finance,
Madacredito, Mamelasoa, Mampita, Meci, Mutuelle de Mandrare, ODRD, ORDMIC, OTIV Alma, OTIV
Boeny, OTIV Diana, OTIV Sava, OTIV Tana, OTIV Zone littoral, PAMF, PAPM, Tiavo, TITEM, Vahatra,
Vatsy, Vola Mahasoa.
35
Figures as at 31 December 2013.

59

Mutual MFI 3 forming a network
MFI category

Minimum capital requirement(MGA)

Mutual Basic MFI

300,000,000

Union

500,000,000

Federation

1,000,000,000

Mutual MFI 3 forming a network

300,000,000

Non-mutual MFI 3

700,000,000

The minimum capital requirement for commercial banks is MGA3 million and MGA100,000 for
financial institutions. Licensed MFIs can operate at national level, but newly set up agencies mustobtain a license from the CSBF.
MFIs are not permitted to open cheque accounts or engage in foreign exchange transactions. Level 1
MFIs (MFI 1) are merely “monitored” (i.e. they are not subject to prudential regulation), whereas
level 2 and level 3 MFIs are subject to prudential regulation and supervision similar to other financial
institutions. Monitoring involves checking the existence of an internal management system,
accounting and internal controls appropriate to their activities. The supervision of institutions by thesupervisory authority consists of checking their liquidity and solvency under prudential standards forthe sector.
MFIs must comply with the Banking Act as well as the Microfinance Law that concerns themspecifically. Regulations being drafted or under review include those covering mobile banking,insurance and consumer protection. Provisions forbidding la Tontine36 are also under consideration,
as la Tontine were widely successful in increasing access to finance (albeit informally) for the more
vulnerable segments of the population, especially to women and the youth. MFIs are required toreport to the CRB (Centrale de Risque MFE (CRM)).
Going forward, it is recommended that the supervisory authority’s capacity be improved. This can bedone by establishing a team dedicated to supervising MFIs and trained specifically for this.
Furthermore; (1) onsite inspections of MFIs should be conducted and an early warning system withappropriate supervisory responses be developed for the microfinance sector, (2) appropriate
provisions be introduced with respect to the disclosure of interest rates and charges and legal
procedures for the collection of nonperforming loans (NPLs), (3) the publication of information on
defaulting clients who cannot be found and (4) to extend the CSBF’s supervisory authority over
informal microlenders.
5.8

MALAWI

5.8.1 Background
Malawi, located in southern Africa and one of the world’s poorest countries, has faced
macroeconomic management challenges for several years. It has a land mass of 94,000 square
kilometres. It has a population of 18 million of which an estimated 50% are women. The average

36
A type of rotating savings and credit association (ROSCA). They function as a savings club in which eachmember makes regular payments and is lent the “kitty” (funds) in turn. The tontine is wound up after each cycleof loans.

60

population density is 174 people per square metre with 16.3% living in urban areas and 53% living
below the poverty line (2004 estimate). The literacy rate is estimated at 65.8% (58.6% women, 73%men). The country’s economic performance has historically been constrained by policy inconsistency,
macroeconomic instability, limited connectivity to the region and the world, and poor health andeducation outcomes that limit labour productivity. The economy is predominately agricultural withapproximately 80% of the population living in rural areas. Agriculture accounts for approximately one
third of GDP and 90% of export revenues. Real GDP growth rate was estimated at 5.7% for 2014
(5.2% for 2013 and 1.9% for 2012).
5.8.2 Access to finance
The financial sector, although relatively shallow, has remained largely stable, helped by the fact that it
is marginally integrated into the global financial system. The country’s banking sector is wellcapitalised and profitable. Prudential regulations have limited net foreign exchange exposure and
NPLs remain low, though spreads continue to be high. The sector is, however, highly concentrated.
The number of depositors with commercial banks per 1,000 adults was 255.79 while the number ofborrowers was 20.39. The outstanding deposits and loans as a percentage of GDP were 44.79% and25.28% respectively. The number of ATMs per 1000km2 was 4.36 and 4.74 per 100,000 adults. The
number of commercial bank branches per 1,000km2 was 3.04 and 3.31 branches per 100,000 adults.
Only 19% of the adult population uses banking services and the Government has provided incentives
to encourage mobile banking services. While the passage of legislation to create a private CRB should
help improve information on credit history, access to credit remains one of the biggest challenges forbusinesses and particularly SMEs. There is huge potential for using mobile banking technology toincrease access in Malawi where mobile cellular subscription is still low. The number of active
mobile money accounts per 1,000 adults was 35.79 and the value of mobile money transactions was
1.56% of GDP.
5.8.3 Malawi’s microfinance regulatory framework
Malawi enacted its Microfinance Regulations in 2010 and benefited from the experience of countries
that had developed their laws earlier. The Regulations fall under the Financial Services Act (FSA),
which also makes provisions for financial cooperatives. MFIs are tiered into the 6 categories shownin Table 5-12. The Microfinance Regulations takes into account the existence of NDT financial
institutions. The minimum capital requirements for each category of financial institution are shown in
Table 5-12, as is the authority responsible for supervising each category.
Table 5-12: Minimum capital requirements for financial institutions in Malawi
Institution Type

Minimum
capitalrequirement

Supervisory Authority

Banks

USD5 mSupervised by the Reserve Bank

DT MFIs

MK250 mSupervised by the Reserve Bank

MK75 mSupervised by the Reserve BankNDT MFIs37

9

Savings and credit cooperatives(SACCOs)38

46

37

Supervision of these is delegated to the Malawi
Union of Savings and Credit Cooperatives

These may collect forced savings but are not allowed to lend them out but must pay interest on the savings.

61

(MUSCCO).
Non Prudential Regulation andSupervision ofMedium to small NDT institutions
Microcredit agencies (MCAs)

Supervised by the Reserve Bank
14

None

Supervised by the Malawi MicrofinanceNetwork (MAMN)

Exempt from regulation
ROSCAs

Not regulated.

The Financial Services Act (FSA) provides for the delegation of supervision to other regulatory
bodies and or sector specific associations. The spirit of the Law is to promote financial inclusivenessby regulating those financial institutions that are large enough that their collapse would put thefinancial sector at risk while ensuring that all players follow best practices of lending and customer
protection.
MFIs are permitted to operate at national level but prior approval is required before opening a new
branch. Branch opening requirements are the same as for other financial institutions but DT MFI
branches must have operational and security infrastructure. NDT MFIs and microcredit agencies(MCAs) are not permitted to open cheque accounts or conduct foreign exchange transactions.
Differences in the supervisory tools lie in the provisioning for asset classification for theuncollateralised portfolio. Other provisions remain the same.
Regulations do exist for agency banking and MFIs are permitted to operate through agents. There areprovisions for mobile banking in the Microfinance Regulations. MFIs are not yet required, however,to report to the CRB. The legislation is being reviewed to make this possible.
The participants from Malawi also identified what they considered to be foresightedness in the designof the microfinance regulatory framework, some of which have already been highlighted above.
These include the recognition of all forms of microfinance delivery channels such as banks, DT MFIs,
microcredit agencies and financial cooperatives; provision for the establishment of DT MFIs; theacknowledgement of the role of technological solutions in financial inclusion; the promotion of
branchless banking, agency banking and mobile banking to promote financial inclusion; tiered capitalrequirements for MFIs and the enactment of a new law, the Personal Properties Act, for theestablishment of collateral registries.
5.8.4 Challenges faced by Malawi’s microfinance sector
The following challenges, however, have been identified and are summarised in Table 5-13. In
addition to the challenges and recommended solutions noted below, the participants also highlighted
the need to introduce fit and proper regulations for shareholders, the approval of auditing firms thatare not necessarily the traditional “big name auditing” firms by the Reserve Bank and the review,
updating and harmonisation of the old laws that also govern the provision of credit and contradict
more recent legislation (such as the CRB laws) as areas for improvement.

38

Financial cooperatives.

62

Table 5-13: Challenges faced by Malawi’s microfinance sector and recommended solutions
Challenge

Recommended solutions

1.

Shortage of staff to regulate
and supervise the variety ofplayers in market

xSupervision has been delegated to industry associations such as
Malawi Microfinance Network (MAMN) and Union of Savings andCredit Cooperatives (MUSCCO)

2.

Inadequate knowledge andskills in the supervision of
microfinance sectorx

Attachment of staff to other supervisory institutions

3.

Difficulties in compliance toregulation by the market due tolimited resources (tools forcompliance and submission offinancial information)x

The regulator is in the process of acquiring a system to be used by
MFIs for processing data and hence enhance financial reporting

4.

KYC requirements notcomplied with fully by themarket due to lack of anational ID system and limited
resources by clientsx

KYC requirements have been relaxed to accommodate low income
customers in the financial sector

5.

Lack of a national ID systemxConsideration of the use of alternatives whilst the country moves
towards introducing a national ID system. Alternatives include
drivers licence; passports; letters from chiefs, heads, leaders of thecommunity, affidavits, just to mention a few

6.

Some, especially MCAs, haveweak MISx

To overcome this, the country is working towards establishing acentral processing hub for sector players

7.

Continued direct intervention
by Governmentx

A rather sensitive issue, this would require dialogue between theregulators/supervisors, government officials and politicians to makegovernment officials and politicians aware of the long term impact
of some of their actions

5.9

RWANDA

5.9.1 Background
Rwanda is small country of 26.3 thousand square km, divided into four administrative provinces andKigali City, 30 Districts and 416 sectors. The fourth Rwanda Population and Housing Census held in2012 indicated the total population of Rwanda was 10.5 million. Rwanda is a rural country with
about 90% of the population engaged in subsistence agriculture and some mineral and agroprocessing.
Tourism, minerals, coffee and tea are Rwanda's main sources of foreign exchange. The average
population density is 477 people per square metre with 28.8% living in urban areas and 44.9% living
below the poverty line (2011 estimate). The literacy rate is estimated at 70.5% (68% women, 73.2%
men). Real GDP growth rate was estimated at 7% for 2014 (4.7% for 2013 and 8.8% for 2012).
5.9.2 Access to financeAs per the FinScope 2012 results, the number of people accessing formal financial services doubled
from 21% to 42% and the number of the Rwandan population excluded financially significantly
dropped from 52% to 28% from 2008 to 2012. The number of depositors with commercial banks per
1,000 adults was 333.28 while the number of borrowers was 14.67. The outstanding deposits and63

loans as a percentage of GDP were 19.86% and 15.22% respectively. The number of ATMs per
1000km2 was 13.54 and 5.16 per 100,000 adults. The number of commercial bank branches per
1,000km2 was 15.69 and 5.98 branches per 100,000 adults. The number of active mobile money
accounts per 1,000 adults was 262.54 and the value of mobile money transactions was 7.57% of GDP.
5.9.3 Rwanda’s microfinance regulatory framework
Rwanda does have a law for microfinance, Law No. 40/2008, supplemented by Regulation No.
02/2009. Four hundred and ninety three (493) MFIs have been licensed to date, 13 limited liability
MFIs, 416 Umurenge SACCOs and 64 Non Umurenge SACCOs with a total of 770 branches and subbranches. Eighty seven per cent (87%) of the branches and sub-branches are located in rural areas(Table 5-14). Other financial institutions are shown in Table 5-15
Table 5-14: Number of MFIs licensed in Rwanda, 2007 - 2014
MFIs/SACCOs

2007

2008

2009

2010

2012

2014

SACCOs

91

104

101

96

63

64

Limited liability MFIs

12

14

13

12

11

13

416

416

490

493

Umurenge39 SACCOs
TOTAL

103

118

114

108

Table 5-15: Number of financial institutions in Rwanda, 2014
Commercial
banks

Cooperative
banks

MFBs

Development
banks

CreditReference
BureauInsurance
Companies

10

1

4

1

1

14

MFIs are tiered into the categories as shown in Table 5-16.
Table 5-16: MFI categories in Rwanda
Category

Description

Category 1xRotating savings and credit associations (ROSCAs) - tontines

Category 2x

SACCOs with less than Rwf20 million in deposits

Category 3x

SACCOs with a minimum capital of Rwf 5 million and deposits above Rwf20 millionx

Limited company MFIs with a minimum capital of Rwf300 millionx

Limited company NDT MFIs

Category 4

The minimum capital requirement is shown in Table 5-17.
Table 5-17: Minimum capital requirements for Rwandan financial institutions
Financial institution

39
40

Minimum capitalrequirement40

An Umurenge is a political subdivision similar to a municipality.
Average exchange rate of Rwf 690/USD as at November 2014.

64

2nd Category tontines & SACCOs

None

2nd Category SACCOs with minimum deposits of Rwf20 million

Rwf5 million

Limited liability MFIs

Rwf300 million

Financial institution

Minimum capitalrequirement41

MFBs

Rwf1.5 billion

Specialized banks

Rwf3 billion

Commercial banks

Rwf5 billion

Insurance companies

Rwf1 billion

Insurance brokers

Rwf50 million

MFIs are permitted to operate at national level and licences are signed by the Governor of the
National Bank of Rwanda (NBR). MFIs are typically allowed to provide credit and mobilise savings.
Other activities such as foreign exchange transactions, holding equity in enterprises, money transfers,
etc., are decided on a case by case basis42.
The Law and Regulation clearly define activities that MFIs are allowed to perform x

The Law highlights various approvals required from the Central Bank (opening of branches,
approval of Directors and Heads of Departments, Approval of External Auditors, etc). This
improves the governance of MFIs.

x

The Law highlights the reports that MFIs need to submit to the Central Bank. All MFIs submit
financial reports to the Central Bank for capital risk analysis.

x

The Law sets key prudential norms for sound microfinance sector (CAR minimum 15%, liquidity
ratio minimum 30%, insider lending maximum 20%, single borrower limit maximum 2.5% of
deposits and 5% of equity, investment in fixed assets maximum 75%.

x

The Law sets good governance and internal control requirements and penalties for noncompliance.

There is no difference between branch opening requirements for MFIs and those for other financial
institutions. MFIs are also required to provide information on individuals who will be running thebranches, branch feasibility studies, branch minimum internal controls and cash security arrangements,
MIS, etc.43. All MFIs in Rwanda are subject to prudential supervision.
The Central Bank, the National Bank of Rwanda (NBR), is the supervisory authority responsible for
all financial institutions (banks, MFIs and insurance companies). Rwanda does have in place Agency
Banking Guidelines issued by the NBR, although no MFI has been authorised to operate through anagency as yet. Regulations on mobile money services and mobile banking are in place. There is a
specialised department at the NBR for the regulation and supervision of payment systems. All MFIs

41

Average exchange rate Rwf 690/USD as at November 2014.
Article 19 of MFI Law No 40/2008, Art 4 of Regulation No 02/2009
43
Article 13 & 14 of MFI Regulation No 02/2009
42

65

in Rwanda are required by law to report to the CRB. There is only one CRB in Rwanda, CRBA, withpenalties for noncompliance44.

Important features of MFI laws and regulation
With the economic development outlook of Rwanda as detailed in the “Vision 2020” paper and theEconomic Development and Poverty Reduction Strategy (EDPRS 1 & 2), Rwanda put in placevarious policies and strategies to develop the economy of which the microfinance sector is to play animportant role.
In September 2006, the Government put in place the National Microfinance Policy. In this Policy it
was recommended that the NBR should develop a legal and regulatory framework for the
microfinance sector. Implementation of this policy included the creation of the Association of MFIs
in Rwanda (AMIR) and enactment of Law No 50/2007 governing cooperatives in Rwanda(cooperatives also include SACCOs).
Additional initiatives included the Financial Sector Development Program 1 & 2, the National
Financial Education Strategy and the National Savings Mobilization Strategy which gave birth to the
Umurenge SACCO Strategy.
Innovative Features of MFIs’ Regulation
A number of innovative features are contained in the design of the regulatory framework for the
microfinance sector. These are the distinction between SACCOs (member based MFIs) and MFIs
owned by shareholders, the licensing of SACCOs created in line with the Umurenge SACCO Program,the regulatory framework for modern payment systems and the establishment of Access to Finance
Forums45 in each of the 30 districts of Rwanda. These innovations have contributed significantly tomore adults accessing and using formal financial services.
5.9.4 Challenges faced by Rwanda’s microfinance sector
A number of challenges have been identified with respect to the Rwandan microfinance sector. These
are listed in Table 5-18 together with the recommended solutions. In addition to the recommended
solutions, some suggestions were made as to the way forward. These were: (1) decentralised
supervision (making more use of inspectors located at the Central Bank’s branches); (2) thecomputerisation of MIS and consolidation of SACCOs; (3) the introduction of a deposit insurance
scheme; (4) the establishment of an “Institute of Cooperatives, MFIs and Entrepreneurship”; (5)FinScope surveys; (6) the harmonisation of the MFI laws and regulations at regional level; and (7) the
creation of a framework for bringing together synergies between financial stability, financial inclusion,
consumer protection and financial integrity.
Table 5-18: Challenges in the Rwandan microfinance sector and suggested recommendations
Challenges
1. Low skills of those involved ingovernance of MFIs (directors andRecommended solutions
x The NBR can approve the appointment of board members andsenior members of staff prior to their appointment

44

Article 17 to 21 of MFI Regulation no 02/2009
This Forum joins local authorities and other stakeholders in the financial sector and discusses barriers toaccess to finance (as well as the recovery of NPLs) granted by financial institutions, especially MFIs.
45

66

2.

staff)
Weak MIS leading to difficulties inreportingx

Challenges

The Central Bank can play a pivotal role in identifying MIS
that can be utilised by the microfinance sector. If a large
number of institutions are willing to obtain/purchase the same
software, large discounts can be obtained making the software
more affordable for MFIs. Poor MIS are often the result of
MFIs thinking that investing in a “good” one will be too
costly. “Bulk” buying can help defray the cost.
Recommended solutions

3.

Gaps in internal controlsx

Guidelines can be issued with respect to internal control
systems and for inspections to focus on these areas until thesystems are “up to scratch”. The supervisory authority canalso make use of the auditors and delegate this function of
ensuring the gaps are filled by the MFI. If there are noprovisions in Law for this function to be delegated, the Law
may need to be revised of Regulations issued

4.

Weak management of the loan
portfolio leading to rising a NPL ratiox

By ensuring compliance failure to which the MFI will be
penalised according to the provisions of the Law46

5.

A large number of scattered MFIs
necessitating high supervisory costx

Adoption of RBS to ensure the efficient and effective use of
the NBR’s resources by focusing on those institutions thatpose the highest negative risk to the financial sector should it
not comply with any provisions of the law/regulations

5.10 SUDAN
5.10.1 Background
Sudan, located in the Nile Valley north of Africa, is an extremely poor country with a total surface
area of 1,861,484 square kilometres. Sudan has experienced protracted civil war and in July 2011, theloss of three quarters of its oil production due to the secession of South Sudan. The oil sector had
driven much of Sudan's GDP growth since 1999. Sudan is attempting to develop non-oil sources ofrevenues, such as gold mining, while carrying out an austerity program to reduce expenditure.
Agriculture continues to employ 80% of the work force. Ongoing conflicts in Southern Kordofan,
Darfur and the Blue Nile States, the lack of basic infrastructure in large areas, and the reliance bymuch of the population (30%) on subsistence agriculture, keeps approximately half the population ator below the poverty line (50%). Sudan’s population is 36.1 million of which an estimated 50% are
women. The average population density is 21 people per square metre with 33.8% of the population
living in urban areas. The literacy rate is estimated at 75.9% (68.6% women, 83.3% men). Real GDP
growth rate was estimated at 3.4% for 2014 (3.7% for 2013 and negative 3.5% for 2012).
5.10.2 Access to finance
Sudan’s financial system, while experiencing substantial growth in recent years, remains small
relative to its regional peers. Intermediation is low, the equity and foreign exchange markets areshallow, and nonbank financial markets and institutions are small and underdeveloped. The banking
sector forms the backbone of Sudan’s financial system and is the primary source of financing for thedomestic economy. Public banks dominate the sector and account for around 50% of total banking
sector assets. Systemic risk is estimated to be low, largely due to low levels of intermediation and thesector’s small size and relative isolation from global financial markets. However, capital adequacy

46

Assuming the penalty will not be such that it causes the failure of the institution, but is sufficient to act asdeterrent to prevent any future non compliance.

67

ratios are below required levels for most institutions. Despite recent growth in the banking sector,
Sudan continues to be under banked, as most banking and financial institutions are concentrated
around the Khartoum area. Only a small share of the population has access to bank services andenterprises often face difficulties in obtaining funding from banks or capital markets. The outstanding
deposits and loans as a percentage of GDP were 20.22% and 14.31% respectively. The number ofATMs per 1000km2 was 0.38 and 4.16 per 100,000 adults. The number of commercial bank branches
per 1,000km2 was 0.28 and 3.11 branches per 100,000 adults.
5.10.3 The Sudanese microfinance regulatory framework
Policies to encourage the microfinance sector date back to 1994/1995 with the Central Bank of Sudan(CBoS) financing policy that incorporated “craftsmen, professionals and small producers including
the productive families” as a priority sector for financing with preferential treatment. Microfinance
was included as a priority sector, with a minimum allocation of 12% of the banking loan portfolio tomicrofinance clients. Moreover, a regulatory and supervisory framework to establish MFIs wasintroduced in 2011.
To improve financing to this sector, the CBoS identified 15 types of guarantees/collateral suitable formicrofinance. The CBoS also identified Islamic lending modes of microfinance and introduced theComprehensive Insurance Documents to act as insurance and a guarantee at the same time (covering
moneylending, assets and Takaful- physical disability or death). Work to establish the Wholesale
Guarantee Agency (Kafalat) is underway. This government agency is meant to guarantee wholesale
finance from commercial banks.
The regulatory framework
Sudan has had a microfinance regulatory frame work since 2006. There are 24 MFIs licensed by theCentral Bank. The minimum capital requirement for MFIs ranges from USD88,000 to USD175,000
depending on the scope of services and deposit mobilisation.
Microfinance clients are associated with “limited income” and described as economically active poor.
A microfinance client is defined as an individual aged between 18 to 70, and a monthly income lessthan double the minimum wage, or has “productive assets” less than SDG20,000, and above all, has
not benefited from official lending sources. This includes many targeted clients in different
microfinance categories such as productive families, craftsmen, technical and vocational training
graduates, university graduates, professionals, rural women, pensioners, etc.
MFIs are permitted to operate nationally but are prohibited from mobilising deposits, issuing
circulating bonds and bills, collecting money or providing banking instruments and investing insecurities and bonds without the CBoS written prior approval. Prior notice must be given to the CBoS
before opening a branch. Supervisory tools used include collateral types, minimum ratio for capital
adequacy, provisions and liquidity.
5.10.4 Challenges faced by Sudan’s microfinance sector
Microfinance landscape
Microfinance is mainly viewed as an intervention to reduce poverty and is not necessarily integrated
in national macroeconomic development objectives. In addition, microfinance is narrowly defined as
the provision of credit with little consideration of other financial services, such as Islamic
microinsurance, microsaving and money transfers. Most prospective microfinance clients believe that
finance is a prerequisite to the existence of the project (enterprise) itself. Some policymakers believe

68that microfinance profit margins (Murabaha margin) should be centrally controlled and microfinanceshould be offered at a subsidised rate to make it more affordable to the poor. In this regard, policy
makers view microfinance as a form of charity and not a lucrative business.
The challenges faced by Sudan’s microfinance sector as highlighted by the Sudanese participant
included changing the mentality of politicians and government officials, integrating microfinance into
the formal financial system, changing the charitable image the public has of microfinance and thehigh operational costs. The recommended solutions are presented in Table 5-19.
Table 5-19: Challenges in the Sudanese microfinance sector and recommended interventions
Challenges to microfinancedevelopment

Recommended solutions

1.

Changing the mentalityx

Training of regulators/supervisors, government officials and policy
makers2.

Integration of microfinancewithin the structure of thecommercial bankx

Moral suasion to get commercial banks to invest in microfinance

3.

Changing the image ofcharity, providing satisfactory
guarantees and collateralsx

Awareness campaigns targeted to politicians and government
officials

4.

High operational cost e.g. tax

xDialogue with other government ministries to address relevant issues

5.11 SWAZILAND
5.11.1 Background
Swaziland covers a land mass of approximately 17,400 square kilometres with a population of 1.4
million of which 50% are women. Approximately 21.3% live in urban areas. The average population
density is 73 people per square metre with 69% living below the poverty line (2006 estimate). The
literacy rate is estimated at 87.5% (87.5% women, 87.4% men). Surrounded by South Africa, except
for a short border with Mozambique, Swaziland depends heavily on South Africa for more than 90%
of its imports and for 60% of its exports. Swaziland's currency is pegged to the South African rand,
effectively relinquishing Swaziland's monetary policy to South Africa. The Swazi Government isheavily dependent on customs duties from the Southern African Customs Union (SACU) and worker
remittances from South Africa supplement domestically earned income. Swaziland’s GDP per capita
makes it a lower middle income country, but its income distribution is highly skewed, with anestimated 20% of the population controlling 80% of the nation’s wealth. Subsistence agriculture
employs approximately 70% of the population. Real GDP growth rate was estimated at 1.7% for2014 (2.8 % for 2013 and 1.9% for 2012).
5.11.2 Access to finance47
Swaziland’s financial sector plays a crucial role in the overall economic growth of the country.
Although the financial sector is small, it is diversified and is responding to the financial andinvestment needs of major sectors of the economy with the nonbank sector growing in recent years,
aided by the high cost of accessing commercial banking services and the financial sector's weakregulation.
47

This part onwards is based on the training proceedings and participants presentations unless otherwise
indicated.

69

Although profitable and well capitalised, supported by sufficient earnings and a strong liquid
environment, banks in Swaziland have very little risk appetite and tend not to lend to high risk
ventures such as smallholder agriculture and rural economic development ventures. Accordingly,
banks have limited penetration in rural areas. Three commercial banks, a building society and astatutory bank48 with 43 branches around the country dominate the Swazi financial system, with South
African banks accounting for the lion's share of the market.
Whilst several significant developments have developed to cater to the needs of major private
business sectors and middle to high end private consumers, there is still a need for products thatembrace the wider community and that will significantly impact economic development.
Consequently, the current perception is that the use of formal financial services is the preserve of theprivileged segment of society. Moreover, there are high costs associated with using formal banking
services. As access to banking services is generally not available to certain segments of the
population, such as those living in rural areas or without steady incomes, it is these groups that
SACCOs and MFIs are targeting. In this regard, there has been marginal growth in the numbers ofnonbanking financial institutions in Swaziland.
Nevertheless, a large part of the population still lacks access to finance. The number of depositorswith commercial banks per 1,000 adults increased to 571 in 2012 from 519 in 2011 while the numberof borrowers increased to 109 from 101 in the same year. The outstanding deposits and loans as apercentage of GDP were 28.02% and 20.65% respectively. The number of ATMs per 1000km2 was
11.16 and 6.16 per 100,000 adults in 2012 (IMF: 2014).
Programmes to improve access to financial services
The Ministry of Finance has initiated a Rural Finance and Enterprise Development Program todevelop microfinance in rural communities. The Government also operates a Small Scale Enterprise
Loan Guarantee Scheme through the Central Bank of Swaziland. The Financial Services Regulatory
Authority (FSRA) is developing a national microfinance Policy and the Consumer Credit Bill iscurrently being debated in parliament.
Financial cooperatives are also an important source of financial services and a large number of people
save and borrow from these institutions. Cooperatives are supervised by the Ministry of Agriculture
and Cooperatives through the Cooperative Societies Act. Supporting the cooperative movement is
considered to be one of the strategies that can be used to support increasing financial services to thepoor.
5.11.3 Swaziland’s microfinance regulatory framework
The Central Bank of Swaziland’s (CBS) main objective is to foster financial sector stability and thesmooth functioning of the financial system in order to maintain confidence in the financial system, toprotect financial sector consumers and prevent adverse spill over effects onto other sectors of theeconomy. The Financial Institutions Act (FIA) of 2005, prior to the enactment of the FSRA Act in2011, provided the legal framework for the regulation and supervision of banks and nonbank financial
institutions. The FIA empowered the Central Bank to license these institutions. Two kinds oflicences were issued under the FIA; (1) the banking licence and (2) the credit institutions licence. The
FSRA is the authority now authorised to issue licences to and supervise nonbank financial institutions.

48

These are Nedbank, Standard Bank, First National Bank of Swaziland, Swaziland Building Society (a mutualsociety bank) and Swazibank (100% government owned but for which privatisation is being considered).

70

The FSRA Act provides the legal framework for regulating and supervising the activities of nonbank
financial institutions. These nonbank institutions include SACCOs, insurance companies and pension
funds. The main objective of establishing the FSRA was to ensure that all financial institutions are
regulated and supervised. The FSRA has not yet started supervising nonbank financial institutions
that were not supervised by the Central Bank. Swaziland has a vibrant microfinance industry withmore than 100 institutions. The microfinance industry is still essentially unregulated and very little
information is available on the size and nature of MFI operations. Although the FSRA covers
numerous aspects of the nonbanking financial sector, there is currently no credit or consumer
protection legislation.
What will a successful launch of the microfinance regulatory framework depend on?
The Government believes that it is important to introduce a Microfinance Regulatory Framework to
improve the protection of Swaziland’s financial system, protect consumers, prevent fraud in thefinancial sector and restrict entry of players to the market to those who are credible. A successful
launch will depend on the acceptance of the Microfinance Regulatory Framework by major
stakeholders, the use of a marketing strategy and campaigns that will necessarily include workshops
and consumer education, and Government’s buy in, Government being a major source of funding for
the FSRA.
5.11.4 National strategies for financial inclusion
Swaziland would appear to be on the right path in getting its regulatory and supervisory framework inplace. It has the advantage of being able to draw on other country experiences that have advanced
significantly in this respect. Moreover, Swaziland can also draw on work that has been done by anumber of organisations that focus on matters of financial inclusion and making sure it adheres toprinciples that have been promulgated49.
In 2012, the Ministry of Finance set up a Financial Inclusion Task Team comprising representatives
from the Microfinance Unit, the Central Bank and the Financial Services Regulatory Authority. The
Financial Inclusion Task Team serves as steering committee for the MAP project and is mandated todevelop a financial inclusion strategy for Swaziland.
In May 2013, Swaziland joined the Alliance for Financial Inclusion (AFI) and will no doubt benefit
from being a member of this Alliance. Swaziland now has a draft Microfinance Policy (May 2015)that is awaiting approval.
In addition to the work already done in gathering data in this space, such as the FinScope Consumer
Survey 2014. The FSRA, together with FinMark Trust, will conduct research on the charges and fees
being charged by this sector. At present, the charges and fees are considered exploitative andexorbitant by the public.
5.12 UGANDA
5.12.1 Background
Uganda, a landlocked country in east Africa, has substantial natural resources, including fertile soils,
regular rainfall, small deposits of copper, gold and other minerals and recently discovered oil.
Agriculture is the most important sector of the economy, employing over two thirds of the work force.

49

E.g. by signing up to the Maya Declaration of the Alliance for Financial Inclusion (AFI), the G20 Principles
and First Initiative’s Lessons Learned Series.

71

It covers a surface area of 241,600 square kilometres with a population of 37. 6 million of which 50%
are women. Approximately 16.1% live in urban areas. The average population density is 188 people
per square metre with 19.7% living below the poverty line (2013 estimate). The literacy rate isestimated at 78.4% (71.5% women, 85.3% men). Real GDP growth rate was estimated at 4.9% for2014 (3.9% for 2013 and 2.6% for 2012).
5.12.2 Access to financeA large part of the population still lacks access to finance, particularly in rural areas. It is estimatedthat formal financial institutions serve only 14% of the rural population while informal institutions,such as village savings and loans associations, serve another 12%. The number of depositors withcommercial banks per 1,000 adults was 190.99 and 19.14 for borrowers. The outstanding deposits
and loans as a percentage of GDP were 19.08% and 16.65% respectively. The number of ATMs per
1000km2 was 4.47 and 4.77 per 100,000 adults in 2012. The number of commercial bank branches
per 1,000km2 was 2.73 and 2.91 branches per 100,000 adults. The value of mobile moneytransactions was 37.45% of GDP.
5.12.3 Uganda’s microfinance regulatory framework
Uganda has a tiered framework which provides for the possible graduation of MFIs from one tier tothe next. The tiers are detailed in Table 5-20.
Table 5-20: Financial institution tiers
Tier

Description

Tier 1

Tier 1 is regulated under the Financial Institutions Act (FIA), 2004

Tier 2Tier 2 is regulated under the FIA, 2004

Tier 3Tier 3 is regulated under the Microfinance Deposit Taking Institutions Act, 2003

Tier 4Tier 4 institutions (SACCOs and NDT MFIs) in general do not have an appropriate
regulatory framework.
However, since Tier 4 institutions form a legitimate and well appreciated segment of the
microfinance sector in Uganda, plans to have them regulated and supervised are currently
underway

Table 5-21: Key stakeholders of tier 3
Players

Objectives

Government of
UgandaxFight against poverty in Uganda through, inter alia, the promotion and development of
microfinancex

Increase in access to financial services, particularly to the poor and low income people
living in the rural areasx

Focus on the safety and soundness of the financial system, thus lowering systemic riskxProtect depositor’s fundsxDeepen and widen the financial sector in Uganda in a safe and sound manner(currently spearheading the financial inclusion project)x

Diversify sources of funding (equity, borrowings and depositors)x

Improve position in the market and image

Central Bank

MDIs

72

There are four licensed microfinance DT institutions (MDIs), 266 foreign exchange bureaux, 54
foreign exchange remitters and several moneylenders. The minimum capital requirement for an MDI
is Shs500 million (approximately USD80,000). The minimum capital requirement for commercial
banks and credit institutions is Shs25 billion (approximately USD9.03 million) and Shs1billion(approximately USD361,000) respectively. MDIs operate at national level. There are a number ofactivities that MDIs are not permitted to engage in without prior Bank of Uganda (BoU) approval.
These are listed in Box 5-5 below.
Box 5-5: Prohibited activities for Ugandan microfinance deposit taking institutions
Prohibited activities
An MDI shall not, without the approval of the Central Bank, whether alone or with others, engage in thefollowing activities and dealings (a) opening and operating demand cheque accounts;(b) engaging directly or indirectly for its own account or on a commission basis, in trade, commerce, industry,
insurance or agriculture, except in the course of the satisfaction of debts due to it for the purpose of carrying on
its business;(c) acquiring or holding, directly or indirectly, in the aggregate, any part of share capital of, or make any capital
investment or otherwise have any interest in enterprises engaged in trade, commerce, industry or agriculture inexcess of twenty-five per cent of its core capital, except in the course of the satisfaction of debts due to it; but insuch a case all shares and interests shall be disposed of at the earliest reasonable opportunity;(d) underwriting and the placement of securities;(e) transacting in computer networks or electronic commerce;(f) engaging in trust operations;(g) taking deposits and lending in foreign exchange;(h) intermediating loan insurance funds;(i) purchasing a non-performing or low quality loan from any of the directors, officers or affiliates of theinstitution or their related interests; and or(j) Dealing in derivatives.

All regulated financial institutions have the same branch requirements geared towards ensuring thesafety of public deposits. The same supervision tools and enforcement mechanisms are used for
MDI’s, credit institutions and commercial banks. MDI’s are supervised under the Microfinance
Division of the Non Bank Financial Institutions Department. This Department falls under theSupervision Directorate of the Central Bank.
There are no regulations for agency banking, nor are there regulations for mobile money. However,mobile money is allowed and guidelines were issued to all players in 2013. Mobile banking is also
allowed. It is a financial service that is approved by the Central Bank on a case by case basis. MDI’s
are required by law to report to a CRB.
In addition to the MDI Act of 2003, MDIs are subject to the Microfinance Deposit Taking Institutions
Regulations of 2004 for Reporting, Liquidity and Funds Management, Capital Adequacy and Asset
Quality and Bank of Uganda Financial Institutions, 2010; Guidance note on Outsourcing, 2009;
Guidelines on Business Continuity Management for Supervised Financial Institutions, 2008; andperiodic directives pertaining to MDI operations. Table 5-22 lists the prudential requirements that
MDIs have to comply with.

73

Table 5-22: Examples of key prudential requirements
FeatureComment

Ownership andCorporate
Governancex

No person or group of related persons shall hold more than 30% of the shares of an
MDIx

Board of at least 5 peoplex

50% of directors must be resident in Ugandax

The board chairperson must be an independent nonexecutive director.

xFour eyes principle - 2 executive directors

x

All shareholders, board members and senior managers are vetted by BoU under thefitness and probity test.

x

Minimum entry and ongoing capital requirements = Shs500m

xCore capital/RWA > 15%x

Total capital/RWA > 20%

Liquidity
RequirementsxLiquid assets => 15% of total deposit liabilities

Prohibited
Transactions

x

Opening and operating demand cheque accountsx

Taking deposits and lending in foreign exchangexIntermediating loan insurance fundsx

Dealing in derivativesx

Objective is to compensate depositors for losses incurred by them in the event of theinsolvency of an institutionx

Depositors are protected up to Shs3mx

MDIs contribute 0.2% of average weighted deposit liabilities of previous yearx

Additional 0.1% and 0.2% shall be made as a risk adjusted premium for MDIs rated
marginal and unsatisfactory respectivelyx

All MDIs must report to the CRB

xReduces information asymmetry between borrowers and the MDIsx

Reduces multiple borrowing, thereby reducing defaultxProvides an objective tool for risk management through information sharingx

Credit facility < 1% and 5% of core capital to individual and group borrower
respectivelyx

Aggregate unsecured facilities to insiders must be < or = 1% of core capital

CapitalMDI Deposit
Protection Fund

Credit Reference
BureauCredit Limits

5.12.4 Challenges faced by Uganda’s microfinance sector
A number of challenges to microfinance development were highlighted by the participants. These arelisted in Table 5-23 together with the recommended solutions.

74

Table 5-23 Challenges in Uganda’s microfinance sector
Challenges to microfinancedevelopment

Recommended solutions

1.

Credit only MFIs are not regulatedx

A separate body to take on this mandate (proposed UMRA –Uganda Microfinance Regulatory Authority)

2.

The term MDI does not have a local
language equivalent. Consequently,
the use of the word ‘Bank’ is usedunlawfullyx

An amendment to the Act to rename MDIs

3.

Some MDIs want to engage in riskier
business, as do commercial banks,
without increasing their capitalx

Sensitise MDIs as to the rationale for the prohibitions andencourage them to review their strategies and considertransformation to a higher tier

4.

Weak corporate governance structuresin some MDIs leading to a break
down in system of checks andbalancesx

Continuous assessment of fitness of board member andsenior management probity

5.

Target market for MDIs tend to have
low financial literacy levelsx

Financial inclusion is an initiative under the Central Bank
strategic plan 2012 - 2017x

Spearheading of “The Strategy for Financial Literacy in
Uganda 2013” by the BoU

xFinancial Consumer Protection Guidelines have been issuedx

A Financial Inclusion Division was established in 20146.

Overlap of the financial and social
motivation of shareholders (social
motivation versus commercial
interests)x

Need to improve focus on social assessment

7.

The capital requirement of Shs500
million is considered too high andmay be a hindrance to some MFIs
applying for an MDI licencex

BoU considers this minimum capital level to be appropriate
for the initial start up

8.

Whilst MDIs are required to report acredit reference bureau, non-regulated
MFIs are notxThis will be addressed once all MFIs are under some form of
regulation

9.

Lack of regulations for mobile moneyx

Mobile money is permitted on a case by case basis andguidelines issued to all players in 2013

x

Proposals in place (described below)

Tier 4 MFIs
10. No regulations as yet (but proposed
principles approved by Cabinet 2013)

5.12.5 The proposed regulatory and supervisory framework for Tier 4 MFIs
Background
Following the enactment of the MDI Act in 2003, Parliament directed the Ministry of Finance,
Planning and Economic Development to come up with a regulatory framework for Tier 4 MFIs (i.e.

75all institutions engaged in microfinance business not regulated by the Central Bank). In line with thisdirective, consultation with various stakeholders in the microfinance industry was carried out toensure the resulting regulations were enabling. The Ministry came up with proposed principles whichwere approved by Cabinet in 2013 and embodied in the first draft of the Tier 4 MFI Bill50.
Tier 4 Microfinance Institutions Bill
The proposed bill is intended to promote the safety and soundness of the financial system, the safetyof depositors’ funds, the legitimacy of and confidence in the microfinance sector, consumer protection
and social economic development. The proposed provisions of the Bill cover: (1) the establishment of
an autonomous regulatory and supervisory body, the Ugandan Microfinance Regulatory Authority(UMRA), its governance structure and functions and (2) the regulation and supervision of SACCOs,
NDT financial institutions, moneylenders and commodity based microfinance. Furthermore, 3categories are proposed for the classification of licences for SACCOs and NDFIs. These aresummarised in Table 5-24.
Table 5-24 Classifications for Ugandan SACCOs and NDFIs
Category

Description

Supervisory authority

Category A

Voluntary savings greater or equal to UGX1.5bn(USD0.5m)

BoU

Category B

Voluntary savings greater or equal to UGX300m(USD0.11m) but less than UGX1.5bn

UMRA

Category C

Voluntary savings below UGX300m (USD0.11m) andwhose minimum capital is less than UGX100m

Self regulation via an apex
organisation

The Bill also has provision for MFIs to engage in Islamic banking with regulations developed by the
Ministry. Tier 4 institutions will be required to report their financial condition to their respective
supervisory authority.
5.13 ZAMBIA
5.13.1 BackgroundZambia, a landlocked country in southern Africa, has a surface area of 752,600 square kilometres. It
has a population of 15.5 million of which an estimated 51.3% are women. The average population
density is 20 people per square metre with 38% living in urban areas and 60.5% living below thepoverty line (2010 estimate). The literacy rate is estimated at 63.4% (56% women, 70.9% men).
Zambia has had one of the world’s fastest growing economies for the past ten years, with the real
GDP growth rate estimated at 5.4% for 2014 (6.7% for 2013 and 6.8% for 2012). Despite strong
economic growth and its status as a lower middle income country, widespread and extreme rural
poverty and high unemployment levels remain significant problems, made worse by a high birth rate,a relatively high HIV/AIDS burden and market distorting agricultural policies. Economic policy
inconsistency and poor budget execution in recent years has hindered economy growth andcontributed to weakness in the kwacha, which was Africa’s worst performing currency during 2013.
50
A technical committee mandated to draft guidelines in line with the approved Principles that were submitted to
the First Parliamentary Counsel which came up with a first draft the Tier 4 MFI Bill was subsequently
constituted comprised of key stakeholders; namely the Ministry of Justice and Constitutional Affairs, MTIC,
BoU, AMFIU, UCSCU, UCA, UCCK, Uganda Institute of Bankers, Registrar of High Court, NGO Board andUganda Registration Services Bureau.

765.13.2 Access to finance
Access to finance rates in Zambia are significantly lower than the African average, with 62.7% of the
population lacking access to financial services. Zambia's financial sector is relatively small anddominated by banks, accounting for about 90% of financial sector assets. Concentration is high, withthe five largest banks accounting for the bulk of total banking assets. The state owned Zambia
National Commercial Bank (ZANACO) alone accounted for 24% of the retail banking market. The
number of depositors with commercial banks per 1,000 adults was 273.67. The outstanding deposits
and loans as a percentage of GDP were 27.15% and 17.83% respectively. The number of ATMs per
1000km2 was 1 and 9.92 per 100,000 adults. The number of commercial bank branches per 1,000km2
was 0.49 and 4.85 branches per 100,000 adults. The number of active mobile money accounts per
1,000 adults was 11.83 and the value of mobile money transactions was 1.07% of GDP.
5.13.3 Zambia’s microfinance regulatory framework
Financial sector laws
Zambia’s financial sector is governed by a number of laws and regulations. The principal acts arelisted in Box 5-6.
Box 5-6: Principle acts governing the Zambian financial sector
Financial sector actsxBank of Zambia (BoZ) Act

x

Banking and Financial Services Act (BFSA) as amended - applicable to commercial banks and nonbank
financial institutionsx

National Payment Systems Act, 2007- applicable to payment systems and payment system businessesx

Building Societies Act

xDevelopment Bank of Zambia Act

x

National Savings and Credit Actx

Prohibition and Prevention of Money Laundering (PPML) Act, 2001

x

Financial Intelligence Act

Regulations and directivesxMicrofinance Regulations (MFRs) of 2006 (issued under the BFSA)

x

Bureau de Change Regulations of 2003 (issued under the BFSA)x

BoZ Anti Money Laundering Directives (issued under the PPML Act)

Draft bills and regulationsx

Draft Microfinance Billx

Draft Credit Reporting Billx

Draft Personal Property Security Interests Billx

Draft Agency Banking Regulationsx

Draft Electronic Money Directivesx

Amendments to the Bureau de Change Regulations

77

The Banking and Financial Services (Microfinance) Regulations, 2006
The Regulations (MFRs) define microfinance service as “the provision of services to small andmicroenterprises and to low income customers and includes the provision of credit facilities usuallycharacterised by frequent repayments and acceptance of remittances and any other services that the
Bank of Zambia may designate”. The MFRs has eight sections covering the definitions andterminology used; BoZ’s authority; licensing; the categorisation, governance, operations andsupervision of MFIs; and lastly, general provisions including administrative penalties.
MFIs are categorised into 3 tiers, Tier 1 which are DT MFIs, Tier 2 – NDT MFIs and Tier 3 – MFIs
with capital of less than K100,000 (USD16,000) (Tables 5-25 and 5-26). Tier 3 MFIs are not subject
to the Regulations and operate under the Money Lenders Act and other pieces of legislation. The BoZ,
in consultation with stakeholders, is developing a regulatory framework for the delegated supervisionof Tier 3 MFIs.
Table 5-25: Categories of MFIs in Zambia
Provisions

Tier 1 MFIs

Tier 2 MFIs

Capital requirements

xK2.5 million (USD416,000) or 15% of
total risk weighted assets whichever ishigher.

x

K100,000 (USD16,000)

Services offeredx

Credit facilities;x

Credit facilities; andx

Savings;x

x

In-country transfers; andAny other service that the
BoZ may authorisex

Others as the BoZ may authorise

Licence application feesxK5,400 (USD900)

x

K1,000 (USD166)

Annual licence feesxK2,700 (USD450)

x

K600 (USD100)

Table 5-26: Characteristics of Tier 1 and Tier 2 MFIs in Zambia
Provisions

Tier 1 MFIs

Tier 2 MFIs

Shareholding limitsx

25% per shareholderx

50% per shareholder

Governance structuresx

To be registered as companiesxx

No trusts

To be registered ascompaniesx

Board of Directors (BoD)/governing bodyx

No trustsx

Qualified CEOx

BoD/governing body,x

Qualified CFO requiredx

Qualified CEO

x

Qualified CFO requiredx

Quarterly reports

Reporting requirementsxMonthly reports

The microfinance landscape
There were 33 MFIs licensed by the BoZ as at 30 November 2014 of which 10 were DT and 23 were
NDT MFIs. Of the 33 licensed MFIs, only 10 are “developmental” MFIs. The minimum capitalrequirement for financial institutions is shown in Table 5-27.

78

Table 5-27: Minimum capital requirements for financial institutions in Zambia
Institution type

Minimum capitalrequirement

USD equivalent

DT MFIs

K2.5 million

USD416,000

NDT MFIs

K100,000

USD16,000

Locally owned banks

K104 million

USD17 million

Foreign owned banks

K520 million

USD86 million

DT Leasing companies

K50 million

USD8.3 million

NDT L:easing companies

K5 million

USD625,000

Development finance institutions

K750 million

USD125 million

Savings and credit institutions

K50 million

USD8.3 million

Credit reference bureaux

K1.5 million

USD250,000

Building societies

K50 million

USD8.3 million

Bureaux de change

K250,000

USD41,600

MFIs

Banks

NBFIs

MFIs can operate in any part of the country. They are only required to provide the BoZ with 14 days
notice when opening a new branch51. This differs from other financial institutions, including banks,
which require prior BoZ approval before opening a branch. Branch requirements are less stringent for
MFIs than other financial institutions. DT MFIs are permitted to provide credit facilities, savings
facilities, linkage banking, money transfers and any other service that the BoZ may authorise. On theother hand, NDT MFIs may only provide credit facilities.
In line with the specific characteristics of microfinance, the provisions relating to microfinance in a
number of areas are stricter than those for other financial institutions. These differences include thefollowing: the capital adequacy ratios for MFIs (15% of RWA) are higher than for banks and other
NBFIs (10% of RWA). As MFIs rely heavily on the loan portfolio as the single most important asset,
it necessitates having a high quality loan portfolio to maintain the overall health of the institution.
Furthermore, the MFRs on asset quality provide for shorter periods when recognising problem loans,e.g. starting at 29 days past due as opposed to 90 days for banks.
Banks and DT MFIs are required to submit prudential returns on a monthly basis. NDT MFIs, which
are non prudentially regulated, are required to submit quarterly returns mainly for statistical
purposes52. The Regulations on agency banking are still being developed. The BoZ has, however, ona case by case basis, allowed MFIs to engage agents in the provision of financial services. All MFIs
that are licensed by the BoZ are required to report to and use the services of a CRB when granting aloan to a borrower.

51

Regulation 32(1) of the Microfinance Regulations.
Returns include the Balance Sheet and Income Statement, Sectoral Distribution of Loans and Advances,Classification and Provisioning of Loans and Advances and Risk Weighted Capital Computation.

52

79

The microfinance supervision function is located in the Non Bank Financial Institutions Supervision
Department of the BoZ. The BoZ has adopted RBS and MFIs are supervised using offsite monitoringand onsite inspections.
5.13.4 Challenges faced by Zambia’s microfinance sector
A number of challenges to the development of the Zambian microfinance sector have been identified.
These include dealing with the unique characteristics of microfinance operations; the need to update,revise and harmonise, where appropriate, legislation in the financial sector so as to minimise
regulatory arbitrage; and the need to take into consideration the costs and benefits of regulating thesector to ensure optimal outcomes.
In addition to the challenges identified above, the participants recommended that regulators andsupervisors focus their attention on defining microfinance in a way that excludes consumer lenders
from taking advantage; reviewing the interest rate cap as it inhibits the sustainability of MFIs;
considering a regime of incentives to encourage MFIs to increase outreach and build capacity; andspeeding up the promulgation of agency banking and mobile banking regulations so that there isclarity in the regulatory environment for financial institutions to adhere to.
Despite the challenges noted above, a number of factors were identified as having been helpful in thedevelopment of the microfinance sector. These factors are the legitimisation of market operators
through the licensing of “microfinance”; improved corporate governance; increased levels oftransparency with respect to ownership and management, financial performance, interest rates, fees
and charges and financial performance; higher capital levels; and the supervision of microfinance thus
fostering the smooth running of the microfinance sector and ultimately, the financial sector.
Furthermore, the introduction of the Regulations has resulted in additional benefits, specifically thepromotion of competition, improved governance structures, increased number of access points,
increased access to credit and increased levels of transparency.
The MFRs can be improved, however, by making a distinction between salary backed lenders(“consumption lending”) and traditional/conventional microfinance.
Secondly, the recently
introduced interest rate cap has had a detrimental effect on the market, especially for the“developmental” MFIs. This needs to be reviewed going forward to prevent the possible stifling of
the industry. Thirdly, the microfinance sector should be incentivised to increase outreach in rural
areas and build institutional capacity. Lastly, the introduction of agency and mobile banking
regulation should be speeded up so as to provide clarity in regulatory framework for microfinance.
5.14 ZIMBABWE
5.14.1 Background
Zimbabwe, a landlocked country in southern Africa and known for its dramatic landscape and diverse
wildlife, has a surface area of 390,800 square kilometres. It has a population of 14.1 million of which
an estimated 50% are women. The average population density is 37 people per square metre with
33% living in urban areas and 72.3% living below the poverty line (2012 estimate). The literacy rateis estimated at 86.5% (84.6% women, 88.5% men). Zimbabwe's economy depends heavily on its
mining and agriculture sectors. Following a decade of contraction from 1998 to 2008, the economy
recorded real growth of more than 10% per year from 2010 to 2013, before slowing to roughly 3% in2014 due to poor harvests, low diamond revenues and decreased investment. Real GDP growth rate
was estimated at 3.2% for 2014 (4.5% for 2013 and 10.6% for 2012).

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5.14.2 Access to financeThe country’s financial sector reflects Zimbabwe’s economic and political distress. The elements of adeveloped financial system are in place but activity has shrunk considerably. The banking sector
remains heavily concentrated with the three largest banks accounting for over 90% of total deposits in2006. The latest available figures put foreign ownership of private banks at 35%. The number ofdepositors with commercial banks per 1,000 adults was 128.62 while the number of borrowers was
47.77. The outstanding deposits and loans as a percentage of GDP were 31.27% and 25.41%
respectively. The number of ATMs per 1000km2 was 1.17 and 5.51 per 100,000 adults. The numberof commercial bank branches per 1,000km2 was 1.09 and 5.12 branches per 100,000 adults. The
number of active mobile money accounts per 1,000 adults was 324.95 and the value of mobile moneytransactions was 21.33% of GDP.
5.14.3 The microfinance regulatory framework
As at 31 October 2014, there were 130 licensed NDT MFIs and DT MFIs and under the supervisionof the Reserve Bank of Zimbabwe (RBZ) in terms of the Microfinance Act (Chapter 24:29). The
supervision of the microfinance industry is conducted through a four tiered approach as indicated in
the Table 5-28. The current minimum capital requirements for MFIs and other financial institutions
are shown in Table 5-29.
Table 5-28: Zimbabwe’s regulatory framework
Tiers

Institutions

Supervisory
Approach

Current Legislation

Supervising
Authority

Tier 1

Building societies,
commercial andmerchant Banks

Prudential
supervision

Banking Act (Chapter 24:20), andBuilding Societies Act (Chapter
24:02)

RBZ

Tier 2

MFBs/DT MFIs

Prudential
supervision

Microfinance Act (Chapter 24:29)

RBZ

Tier 3

SACCOsPrudential
supervision(discretional)

Cooperatives Societies Act(Chapter 24:05)

Ministry of
SMEs andCooperatives
Development

Tier 4Credit only MFIs

Nonprudential
supervision

Microfinance Act (Chapter 24:29),
Moneylending and Rates of Interest
Act (Chapter 14:14)

RBZ

Table 5-29: Minimum capital requirements for MFIs
Institutional type

Minimum Capital Requirement

NDT MFIs

USD20,000

DT MFIsUSD5 million

Commercial banks, merchant banks, building
societies, finance houses and discount houses

USD25 million

Insurance companies

Life assurance - USD2 million
Short term insurance - USD1.5 million

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Institutional type

Minimum Capital Requirement

Asset management companies/investment
management companies

Liquidity capital equivalent to:xCompany’s 3 months operational expenditure
cover; orx

USD250 000 money market investment;

whichever is greater.
Stockbroking firms

Liquidity capital equivalent to:xCompany’s 13 weeks operational expenditure
cover; orx

USD150 000 money market investment;

whichever is greater.

Microfinance licences are issued at a national level. There are currently, however, no licensed DT
MFI in the country. MFIs are prohibited by the Microfinance Act from issuing cheques; opening
current accounts; foreign trade operations; trust operations; investing in enterprise capital;
underwriting or the placement of securities; wholesale or retail trade; or purchasing land except as
may be reasonably necessary for the purpose of expanding the microfinance business.
MFI branch opening requirements are the same as they are for other financial institutions. The
intention is not to differentiate DT MFI branch specifications from those for banks and other DT
regulated financial institutions. There are no prudential regulations for DT MFIs supporting the broad
provisions in the Microfinance Act. The general understanding is that, in most cases, the prudential
regulations will be similar to those for banks, with appropriate customisation where necessary.
Under the Act, MFIs are allowed to conduct their business through agents53. The Agency Banking
Regulations to complement the Act are being drafted. Likewise, mobile banking activities areallowed and banks and other financial institutions do have mobile banking. As for agency banking,mobile banking regulations are being developed. There is currently no legal requirement for banks or
MFIs to report to a CRB. Work is already underway to establish the legal and regulatory framework
for a credit reporting/reference system.
5.14.4 Challenges in the Zimbabwe’s microfinance sector
A number of challenges have been identified. These, together with the recommended solutions, havebeen highlighted in Table 5-30.
Table 5-30: Challenges in the Zimbabwean microfinance sector
Challenges to microfinance development

Recommended solutions

1.

Inadequately capitalised MFIs following
hyperinflationary environment prior to 2009x

Discussion to be continued

2.

Unconventional microfinance (with a focus on
security, high interest rates and salary based
lending)x

Require justification of interest rates at licensing &licence renewal stages

53

Section 27

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Challenges to microfinance development

Recommended solutions

3.

x

Proposed New Act (2013) has robust consumer
protection provisions

x

Consumer education and awareness initiativesx

New Act (2013) has robust consumer protection
provisions

x

Consumer education and awareness initiativesx

New Act (2013) has robust consumer protection
provisions

x

Proposals to transfer supervision of large SACCOs
to the central bankx

Consumer education and awareness initiatives

4.

5.

Increasing over-indebtedness among MFI clients

Illegal DT activities by credit-only MFIs

Inadequate SACCO regulatory framework also
leading to illegal DT

Other innovations in the regulation of microfinance, also included amongst the recommended
solutions some of which have been mentioned in Table 5-30, include adopting the Smart Campaign –Core Client Protection Principles 54 , the development of a public awareness programme formicrofinance consumers, the drafting of a new Act with comprehensive consumer protection
provisions including a Code of Conduct and ongoing capacity building initiatives in conjunction withthe microfinance association.
5.15 DJIBOUTI
5.15.1 Background
Djibouti, located in the horn of Africa, has a surface area of 23,200 square kilometres and a
population of 1 million. The average population density is 38 people per square metre with 77.3%
living in urban areas. An estimated 18.8% lives below the poverty line. Djibouti’s real GDP growth,
supported by large inflows of foreign direct investments (FDIs), averaged 4.2% a year from 2004 to
2008, reaching a high of 5.8% in 2008. Economic performance has remained strong despite slowing a
bit in 2009 as the global economic and financial crisis led to decreasing trade activity and delays andcancelations in several FDI projects (decreasing from 23.3% of GDP in 2008 to 18% of GDP in 2009),
though important investments in maritime services did partly offset these effects. As a result, real
GDP growth declined to 5.0% in 2009 and 3.5% in 2010. Although the country was affected in 2011by unfavourable events that hit its economic performance, real GPD growth increased to 4.5% in 2011,
4.8% in 2012 and 5.0% in 2013. Real GDP growth rate was estimated at 6% for 2014.
5.15.2 Access to financeDjibouti's financial sector grew rapidly from 2006 and was not heavily affected by the financial crisis.
By the end of 2011, banking and insurance represented a growing proportion of GDP reaching 13%.
Money transfer services, which hold a strategic place in the country's financial system, have expanded
following the arrival of an international money transfer network onto the market. Access to financial
services is expanding, following the implementation of new state directives aimed at opening up thebanking sector, facilitating loan provision and deepening financial intermediation. This has beenfurther reinforced by the entry of several new financial institutions, most of which are foreign owned.

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http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles

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Weak enforcement of creditor rights, however, and the absence of comprehensive information on
borrowers keep lending risks high.
Djibouti's banking sector, which features both Islamic and conventional banking, saw the arrival of
new banks bringing the number of institutions to 11 compared with only two in 2006. The sector
remains highly profitable with a low level of NPLs (approximately 6%). Even so, the sector remains
very concentrated with two main banks accounting for 85% of assets. Under directives issued in thelast few years, all public and private sector employees earning more than FDJ40,000 are required tohold a current bank account, a move which has led to an important increase in bank deposits. The
number of depositors with commercial banks per 1,000 adults were 143.86 and 66.8 for loan accounts.
The outstanding deposits and loans as a percentage of GDP were 80.31% and 29.53% respectively.
The number of ATMs per 1000km2 was 1.34 and 5.44 per 100,000 adults. The number of commercialbank branches per 1,000km2 was 1.25 and 5.09 branches per 100,000 adults.
5.15.3 The microfinance sector
Microfinance is growing in Djibouti, but access to finance remains limited for SMEs, reducing thepotential for self employment. Currently, only 4% of the population benefits from microcredit. In
future years, MFIs are expected to develop a range of new services including microinsurance andmicrotransfers. Authorities are also working closely with banks to address these issues and further
expand their range of financial products and services (such as ATMs, Islamic products and products
for SMEs).
5.16 ERITREA
5.16.1 Background
Eritrea, a country in the horn of Africa, is bordered by Sudan in the west, Ethiopia in the south andDjibouti in the southeast. It has a surface area of 117,600 square kilometres and a population of 6.3
million of which an estimated 50% are women. The average population density is 63 people persquare metre with 22.6% living in urban areas. Like many African country economies, a large shareof the population (approximately 80%) is engaged in subsistence agriculture. The agriculture sector,
however, only produces a small share of the country’s total output and an estimated 50% of the
population lives below the poverty line (2004 estimate). The literacy rate is estimated at 73.8%(65.5% women, 82.4% men).
Following the country’s emergence from a long war of independence from Ethiopia in 1993, its
economy enjoyed high growth for several years at an average annual rate of 10.9%. A series ofexogenous shocks, from a severe drought in 2008, to the international food and oil price crises of thatyear, to the global recession and economic crisis, have significantly weakened Eritrea’s growthprospects, caused accelerated inflation and stalled progress in fiscal consolidation. Following theseshocks, real GDP contracted by 9.8% in 2008 before recovering with an average GDP growth of 4.9%
between 2009 and 2011. Real GDP growth rate was estimated at 1.7% for 2014 (1.3% for 2013 and
7% for 2012).
5.16.2 The financial sector
The country’s formal financial sector is very small and mainly state owned, providing only
rudimentary financial services to the economy. In addition to the Central Bank and two commercial
banks, the only financial institutions are the Eritrean Development and Investment Bank (EDIB), theNational Insurance Corporation of Eritrea (NICE) and the Himbol Exchange and Financial Service
which provides money transfer and foreign exchange services.

845.16.3 The banking sector
The Commercial Bank of Eritrea is the largest commercial bank in the country. It loans mainly tolarger state owned and private manufacturing firms. The second commercial bank, the Housing andCommerce Bank of Eritrea (HCBE), is a relatively small institution and the only one not to be ownedby the government. Its main asset is a portfolio of loans for infrastructure and construction activities.
All banks are majority owned by the government and no foreign financial institutions operate in the
country.
5.16.4 The microfinance sector
While the Eritrean Government launched microfinance programs in 2005 to extend financial services
to the poor, there is still great potential for further development. The prospects for developing mobilebanking services are limited as Eritrea has one of the lowest mobile phone penetration rates on thecontinent. According to the latest data available, only 4 out of 100 adults have a mobile phone.
5.17 LIBYA
5.17.1 Background
Libya, a country in the Maghreb region of North Africa, has a surface area of 1.76 million square
kilometres and a population of 6.4 million of which an estimated 50% are women. The average
population density is 78 people per square metre with 78.6% living in urban areas. An estimated 33%of the population lives below the poverty line. The literacy rate is estimated at 91% (85.6% women,
96.7% men). Libya's economy is almost entirely dependent on the nation's energy sector, which
generates about 65% of GDP and 96% of government revenue. Income from the sale of crude oil andnatural gas, coupled with a small population, give Libya one of the highest nominal per capita GDPs
in Africa. But Libya’s leaders have hindered economic development by failing to use these financial
resources to invest in national infrastructure. Real GDP growth rate was estimated at negative 24%
for 2014 (negative 13.6% for 2013 and 104.5% for 2012).
5.17.2 The financial sector
Libya's financial system has been strongly affected by the conflict which erupted in 2008. The
financial sector, characterized by low financial depth, is highly centralised and dominated by the
public sector which, according to latest available figures, accounted for more than 90% of activity.
The Government, which nationalised all banks in 1970, has recently engaged in several structuralreforms of the financial sector and initiated several steps towards financial liberalisation, with several
banks recently privatised. As part of the Government's restructuring and privatisation efforts, an asset
management company has been established to deal with bad loans and smaller banks have beenencouraged to seek well established foreign strategic partners.
5.17.3 The banking sector
The country's banking system in 2009 comprised 15 commercial banks, the Central Bank of Libya,
one offshore institution, the Libyan Foreign Bank, three specialised credit institutions (SCIs) which
included the Libyan Development Bank, one economic development and microcredit bank, one realestate development bank, as well as numerous small regional banks. According to the last reliable
observations, commercial banks are well capitalised and profitable, although nonperforming loans
represented approximately 20% of total loans for the same year. The banking system was alsocharacterised by excess liquidity as low cost credit and onlending provided by SCIs crowded out
commercial bank credit and contributed to liquidity overhang.

85

5.18 MAURITIUS
5.18.1 Background
Mauritius, a volcanic island nation in the Indian Ocean, has a surface area of 2,000 square kilometres
and a population of 1.3 million of which an estimated 50% are women. The average population
density is 620 people per square metre with 39.7% living in urban areas. An estimated 8% is living
below the poverty line (2006 estimate). The literacy rate is estimated at 90.6% (88.5% women,
92.9% men). Mauritius is widely recognised as one of the strongest economies in the region with abusiness friendly environment. It has achieved remarkable economic and social success, based ongood governance and well developed legal, financial and commercial infrastructure. Real GDP
growth rate remains strong although it was estimated to slow down as the euro area, the country's
main export destination, keeps struggling. Real GDP growth rate was estimated at 3.2% for 2014
(3.2% for 2013 and 3.2% for 2012).
5.18.2 Access to finance
Mauritian households have almost universal access to savings accounts and reasonable access to basic
personal credit, but term and higher-risk financing is more limited. Mauritius has a well developed
financial system. Basic financial sector infrastructure, such as payment, securities trading andsettlement systems, are modern and efficient, and access to financial services is high, with more than
one bank account per capita. The number of depositors and loan accounts with commercial banks per
1,000 adults was 2200.15 and 544.4 respectively, the highest density of accounts in Africa. The
outstanding deposits and loans as a percentage of GDP were 161.81% and 83.97% respectively. The
number of ATMs per 1000 km2 was 221.67 and 43.65 per 100,000 adults.
The number of commercial bank branches per 1,000km2 was 109.85 and 21.63 branches per 100,000
adults. The value of mobile money transactions was 0.05% of GDP. The State Bank of Mauritius,
Orange and Emtel have recently established a partnership to offer state-of-the-art mobile banking
services to their customers. In order to improve access to finance for SMEs, the Government hascontributed approximately USD12 million to set up an SME fund. The fund will allow SMEs toobtain loans from commercial banks with no more than 10% equity.
5.18.3 The banking sector
The country's highly developed and efficient banking system consists of 20 commercial banks withalmost 200 branches across the country and over 240 ATMs. All banks remain comfortably liquid,well capitalised and profitable, with NPLs representing 2.8% of total loans as of 2011. Banks appear
to be in a strong position despite the financial crisis and currently hold very few toxic assets (withoperations funded mainly through domestic deposits rather than interbank foreign borrowing),
maintain almost a third of total deposits in liquid or near liquid assets, have limited exposure toequities, and hold long foreign exchange positions offering some protection from exchange rate
depreciation. The introduction in 2011 of Islamic banking offering Sharia compliant products andservices contributed to diversifying the country’s financial products.
5.19 SEYCHELLES
5.19.1 Background
The Seychelles is a 115 island country that lies 1,500km east of mainland southeast Africa. It has asurface area of 455 square kilometres and a population of 92,430 of which an estimated 50% are
women. The average population density is 194 people per square metre with 53.9% living in urban
areas. The literacy rate is estimated at 91.8% (92.3% women, 91.4%men). In the few years since the2008 debt crisis, Seychelles has made a remarkable recovery, quickly restoring macroeconomic
stability and creating room for private sector activity. In 2012, however, the Seychelles economy, as
measured by real growth in GDP, only grew at 2.8% as large investment projects were completed,declining from 5.0% in 2011. Real GDP growth rate was estimated at 2.9% for 2014 (6.6% for 2013
and 6% for 2012).

86

5.19.2 Access to financeA large part of the population still lacks access to finance. The number of deposit accounts withcommercial banks per 1,000 adults was 2025.99 and 224.18 for loan accounts. The outstanding
deposits and loans as a percentage of GDP were 54.36% and 27.96% respectively. The number ofATMs per 1000km2 was 97.83 and 65.84 per 100,000 adults. The number of commercial bankbranches per 1,000km2 was 76.09 and 51.21 branches per 100,000 adults. While no stock market
exists in the country, in 2007 the authorities introduced a Securities Act, thereby laying the
groundwork for its future establishment.
5.19.3 The financial sector
The financial sector remains adequately capitalised despite the recent economic downturn and global
economic crisis. Recent liberalisation implemented as part of the reform program has made space tofoster private credit growth, but also created a need for additional prudential regulation. In 2009, thesupervision of NBFIs was transferred to the Central Bank (which was already supervising bankactivities) to build a unified and more effective oversight system. The Central Bank recently started
implementing an 18 month action plan to strengthen RBS and increase minimum capital requirementsin the banking sector. Furthermore, amendments to the Financial Institutions Act, approved by
Cabinet in June 2011, established the legal basis for new financial products and boosted competition.
Overall, banks are in good financial health and adequately capitalised, reporting solid earnings andhigh net interest margins, though these have declined since 2009 due to lower interest rates on
government securities. Private sector credit remains low at approximately 25% of GDP and is
growing slowly despite ample liquidity. The country’s banking sector continues to be dominated bystate and foreign institutions. Plans have been made to privatise state owned financial institutions.

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6

MICROFINANCE DEVELOPMENT CHALLENGES IN THE COMESA REGION

The participants presented the challenges being faced in the COMESA region. For each challenge
identified, recommendations were made to deal with the challenges. The challenges were categorised
under the following headings; regulation, supervision, skills and capacity of the regulators and MFIs,
the ownership/type of institutions, mobile money and financial infrastructure and other challenges.
6.1

REGULATION

6.1.1 Need to obtain collateral when giving loans
One of the challenges identified was the need to get collateral when giving out a loan. The
requirement to have traditional forms of collateral to access finance impedes the growth of financial
inclusion. Regulators need to make provision for a wide range of assets that can be used as security
and the setting up of collateral registries.
The first recommendation to dealing with this challenge was the establishment of a collateral registry.
Some countries may have already established a collateral registry but it is definitely something for all
member states to consider going forward 55 . The existence of a collateral registry increases
transparency and the range of “assets” that financial institutions might be willing to accept as
collateral if there is a requirement, legal or otherwise, to obtain collateral. There should also beawareness campaigns for the general public so that they know about the alternative forms of collateral.
The second recommendation made by the participants was for governments to establish guarantee
schemes, especially for women and the youth, to encourage the provision of finance even in theabsence of collateral. So rather than MFIs focusing on collateral which poor people and low income
households might not have which will severely restrict their access to finance, participants indicatedthat the provision of government guarantees can remove this need because then the government would
incur the risk that financial institutions undertake when the financial institution extends credit.
6.1.2 Interest rate caps
A number of issues came up in the discussion of interest rate caps. Even though only one country,
Zambia, had recently introduced interest rate caps for loans, there is much to learn from its experience.
The participants felt that interest rates should be market determined. This was especially so in thecase of “conventional/developmental” microfinance. In the case of moneylenders, and those MFIs
that lend for consumption, there might be a need to intervene to ensure that consumers are notexploited by being charged high interest rates. The participants also stated that where there wasmacroeconomic instability, there may be a case for government intervention. It was very important,
therefore, for government to pursue policies that foster macroeconomic stability.
The Zambian case provided valuable lessons for other countries that might be considering interest rate
caps. So far, the trend had been that MFIs were now struggling to be financially sustainable because
their source of revenue had been reduced whereas their costs had still remained the same (assuming
they had not risen). Moreover, the training participants indicated that it was important to sensitise
politicians and government officials as to the adverse effects of interest rate caps on MFIs and thesector in general. The discussion of interest rate caps usually arises when politicians and government
officials feel vulnerable individuals and households are being exploited by high rates of interest.
6.1.3 Lack of provisions regarding transparency
The challenge identified was the lack of transparency, especially in the disclosure of interest rates,
charges and fees. Participants recommended that laws need to be put in place to enhance transparency
in the microfinance sector. So for example, interest rates, charges and fees should be clearly stated55

An example of a country that has established a national collateral registry is Malawi.

8888and there should be a legal obligation and a legal way of reporting this information so that consumers
or anyone with a vested interest in the MFI has access to the information. Participants also
recommended that the presentation of this information be standardised so that information is easily
comparable from one MFI to another. In addition to interest rates, charges and fees being disclosed,
DT MFIs must be legally obliged to disclose their financial statements and other information in thesame manner as banks to improve competition, performance and confidence in the microfinancesector.
6.1.4 Balancing the trade-off between achieving the objectives of financial inclusion, consumer
protection, financial literacy and financial stability
All objectives were considered important so there is a need to make sure all are addressed. But inaddressing these objectives, there is also a need to make sure that there is balance and that one
objective should not override the other. So it is really a question of having policies in place that willmeet all conditions. In this regard, participants recommended that COMESA should develop andagree social performance indicators for the microfinance sector to be adopted by member states.
There should be adequate planning and resolution strategies in place for financial crisis resolution.
There should be a coordinated approach by financial sector stakeholders for the implementation offinancial inclusion, financial stability, financial literacy and consumer protection strategies to achieve
the alignment of objectives.
6.1.5 Regulatory provisions regarding the legal institutional form
Whichever legal form is adopted, it is important that the ownership structure of an MFI is transparent
and makes it possible for supervisors to utilise conventional supervisory tools, such as capital calls, as
far as possible. In this regard, participants recommended that a company limited by shares was thepreferred legal form. This legal form also makes it easier to have good corporate governancestructures in place. However, there may be mission drift in the process. There may be a need forregulators to be accommodating and allow for other institutional forms especially where donor
funding is involved to accommodate those MFIs with social missions.
6.1.6 Regional harmonisation of the laws
Most participants felt that harmonisation of the laws can only be pursued when countries are fairly
homogeneous and have reached relatively the same levels of development in their microfinancesectors. This was not the case for the COMESA member states which are at varying levels ofdevelopment. So it would be very difficult at this stage to harmonise the laws. Participants
recommended that at this stage, the important thing would be to develop broad based
guidelines/principles which all COMESA countries should adhere to so that all member states have“minimum” structures in place with respect to their regulatory framework and that meet the needs ofeach of the member countries in terms of financial stability, consumer protection, as well as financial
inclusion.
The participants agreed that at this stage member states should be considering broad based principles
rather than the full harmonisation of the laws. In conclusion, the participants’ recommendation wasthat a study be conducted to determine the different levels of development in each of the member
states and that COMESA should develop broad based practice principles for the Region. The member
states should develop, if they haven’t already, regulations that are context specific. The training
participants also suggested that with respect to the regional harmonisation of laws, lessons be learned
from other experiences where it has been done already, such as West Africa.
6.1.7 Delegation of regulation making it difficult to assign responsibility
The delegation of supervision sometimes makes it difficult to clearly identify the areas of
responsibility for each authority. The recommendation made by the training participants was that the
mandate and responsibilities of each supervisory authority and the institution to which supervision
had been delegated to should be clearly spelt out so that each party knows exactly what it isaccountable for. Participants agreed that the delegator should always be ultimately responsible for8989and accountable when it comes to issues of client protection and anything that the consumer may bedissatisfied with. So even though there may be provisions that stipulate that the authority to which thesupervisory function has been delegated to deals directly with the affected consumers, ultimately, thedelegator cannot abrogate its statutory obligation/responsibility to a third party.
6.1.8 Tendency of regulators to be rigid and non-receptive
It has been observed that regulators and or supervisors can be very rigid and non receptive, especiallywhen it comes to innovation and new products introduced in the market. The training participants
recommended that regulators should employ a light touch when innovation and product development
occurs as was done in Kenya with the advent of mobile banking. This approach encourages
innovation. The regulator must take care not to be too restrictive or conservative as it might result in
the industry being stifled and innovation not taking place.
Participants suggested that one way of dealing with this matter was to have regulators placed in MFIs
so as to have first hand experience and knowledge of what is happening in the market place. Thisknowledge and experience would inform regulatory developments and supervisory practices. It is
important to have an industry that is progressive and innovative because conditions change every day,consumers’ needs change everyday, and so products and services provided should keep up with thesechanges and meet the needs of consumers.
The other recommendation made was the establishment of an information exchange so that countries
can learn from each other. So where one country has already had an experience with a similar type ofinnovation or product, it can share its experience with other member states in a formalised, structured
manner. There is a wealth of experience in member states (and other countries). With a centralised
information exchange hub, regulators are able to learn from other member states. This is already done
to a large extent, even if it is not necessarily through an information exchange hub, through the use of
study teams, requests for information, and so on.
6.2

SUPERVISION

6.2.1 Insufficient capacity to supervise all institutions and the high costs of supervision
A recurring theme in the training was the insufficient capacity to supervise all institutions and thehigh costs of supervision. Participants recommended the adoption of RBS. The use of RBS ensuresthat supervisory resources are used effectively and efficiently and concentrated on those areas where
the risk is the highest, within the financial institution and the financial sector as a whole. The second
recommendation made was that a tiered approach be adopted. This is the approach taken by a numberof COMESA countries, such as Malawi, Kenya, Uganda, Zambia and Zimbabwe. Consequently, thesupervisory authority would only focus its efforts on DT MFIs and apply prudential regulation andsupervision to those MFIs. For NDT MFIs the focus would be on registering them, consumer
protection and then depending on their risk profile in relation to their significance in the financial
system, delegate their supervision to another authority. The third recommendation was that somesupervisory functions could be outsourced and or external experts employed, as is done in Kenya.
With respect to meeting the costs involved, the recommendation made was the expansion of theresource base for the supervisory authority. This could be done by charging supervisory fees todefray some of the costs. There was also a suggestion that the expansion of the resource base might
be achieved by charging penalty fees. However, this was considered a less desirable option because
the objective of supervision is full compliance (i.e. 100% compliance). In this regard, penalty fees
should not be considered a source of income by the regulatory/supervisory authority.
The last recommendation of charging penalties, even if justified, generated some debate. Arguments
against included, firstly, it may result in a shift in focus from helping MFIs achieving compliance tofault finding in order to penalise them. Secondly, if the rate of noncompliance is high, the supervisor
should be concerned because the supervisor’s objective is to ensure full compliance. Ideally, there
should be no line item in the supervisory authority’s budget for penalties as this sends the wrong
message and would ultimately imply that the supervisor was not doing its job effectively. In the end,

90
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participants conceded that consideration should be given to the introduction of supervisory fees overpenalties.
6.2.2 Lack of skills and knowledge to supervise innovative/new products
In terms of the lack of skills to supervise innovative and new products, participants recommended thatsupervisors be placed in MFIs to get hands on experience and knowledge from the MFIs that are
innovating and producing new products. The recommendation was also made that supervisory teams
be constituted with mixed skills to pool together the different strengths of the different disciplines(such as IT, law, accounting, economics, etc.) to conduct the inspections. Lastly, the training
participants stated that it was imperative to have continuous capacity building programmes forsupervisors.
6.2.3 Large geographic areas that need to be covered
One of the challenges identified was the large geographic areas that need to be covered in somecountries. As for the lack of capacity to supervise all MFIs, the participants recommended theadoption of RBS to allocate supervisory resources efficiently and effectively, i.e. where risk is thehighest. Other strategies that might be considered are the decentralisation of the supervisory function
and outsourcing or delegating the supervisory function as appropriate.
6.3

SKILLS AND CAPACITY OF REGULATORS AND MFIS

6.3.1 High rate of delinquency (MFI capacity)
One of the challenges raised by the participants was the high rate of delinquencies in MFIs as a resultof loan officers not knowing how to effectively assess loan applications. So training is needed in thisregard, especially for loan assessment and underwriting. Some countries have a requirement for the
consumer’s ability to repay the loan be assessed (affordability assessment) before the loan is granted
as this has a huge impact on consumer’s ability to repay the loan. Some countries, e.g. South Africa,
have prescribed this in law. In South Africa’s case, if a financial institution gives out a loan and does
not cover all the steps stipulated in the affordability assessment prescribed in law, the financial
institution is liable for issuing a bad loan and cannot take that individual to court to recover the loan
should it become delinquent.
Secondly, the training participants recommended that MFI staff obtain certification from the MFI
association to confirm that they have achieved a minimum level of skills. So for countries withmicrofinance associations, one of the association’s responsibilities would be to ensure that theirmember institutions’ staff undergo some sort of evaluation or skills assessment to make sure MFI staff
meet the minimum requirement to be employed in the industry. This can also be legislated. A lot ofother professions have this requirement in place, such as the lawyers, accountants, etc. Receiving
certification would be no different to what is practiced by other professional bodies/sectors.
6.3.2 Poor MIS and the high costs of acquiring an adequate MIS
In most, if not all member states, the existence of poor MIS in a significant number of MFIs wasfound to be a challenge. This resulted in MFIs not being able to produce relevant information andreports (with respect to NPL for example). This raised the question of how management was
managing the MFI in the absence of an adequate MIS. Participants recommended that the supervisory
authority should identify a software package that can handle, at a minimum, all the activities
undertaken by an MFI. And the supervisory authority might also subsidise the cost of procuring thatsoftware package. This will not preclude an MFI (especially the larger MFIs), however, fromobtaining an MIS that is more suited to its needs. What this approach will help achieve is to ensure
that, at a bare minimum, every MFI will have the capability to produce and maintain the required

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records, carry out the necessary calculations and produce the relevant records/reports for the MFI’s
activities56.
In addition to the solution identified above, an alternative solution (which is being implemented in
Kenya) is being provided at the association level for MFIs which have constraints in terms of theirbudget. The MFI associations/networks, together with the supervisory authority, are hosting a system
which is easily customisable centrally at the association level, which MFIs can access and are thencharged a transaction fee which is manageable. This negates the need for MFIs to provide a hugebudget to buy a new system. This also means that the association is responsible for (1) dealing withthe maintenance which can be a huge cost as opposed to every institution employing an IT person and(2) purchasing the licence(s) that comes with it which can also be a very costly.
Similarly, Malawi is developing a central processing centre which MFIs can link into. Malawi is
drawing from the experiences of Ecuador and Mexico who have done something similar57. MFIs havean account which they use to access the services provided by the central processing centre. Malawi
thinks this is a national solution and it might be a solution for the Region. The system should be
implemented by July 2015.
6.4

OWNERSHIP/TYPE OF INSTITUTIONS

6.4.1 Mission drift in transformation
The challenge identified here related to the preferred legal form for MFIs. Companies limited byshares were considered the best legal form, the main reason being that regulators and supervisors wereconcerned about being able to identify the owners of the MFIs. This is very important because of thesupervisory tools that are used, such as capital calls, the removal of directors/shareholders, etc. It isalso a very important consideration when it comes to corporate governance, especially for DT MFIs,
and also to ensure that shareholder transactions can be identified easily.
But then there was also the matter of mission drift that occurs in transformation, especially if an MFI
is required to change to a company limited by shares because shareholders tend to want to maximise
returns on their investments and that might result in the objective of the MFI moving away from adevelopmental objective to that of meeting the shareholders objective of profit maximisation. So thisis one of the challenges that was discussed and how to deal with the matter of mission drift intransformation. One of the groups brought up the idea that regulation should be clear on theconditions for the different types of institutions. From this it was discussed that different legal forms
for MFIs might be linked to the type of activities the MFIs undertake.
6.4.2 Restructure provisions regarding institutional legal form
This point proved to be very challenging and there wasn’t much of a discussion around this point.
6.5

MOBILE MONEY AND FINANCIAL INFRASTRUCTURE

6.5.1 Lack of interoperability of service provider networks
Government should encourage improved relationships between the different MNOs in terms of thedifferent companies within the countries, as well as in the Region. And also to try and get the MNOs
to engage in conversation that will minimise costs as far as possible. South Africa has gone as far as
to legislate the maximum fee that can be charged between operators with respect to interoperability.

56

When procuring a software package, there is need to look at the support that will be available, the timeframe
for which that support will be available, the training that the MFI will have access to and the possibility ofcustomisation, in addition to the cost. For any business solution, there is no such thing as one size fits all. So
the solution must be customisable to fit the needs of the MFI.
57
And possibly India.

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6.5.2 Enhancing transparency through CRB reporting
It was noted that a number of member states did not have CRBs and in some cases, those that did, did
not require MFIs to report to them. Ideally each member state should have legislation permitting theexistence of CRBs and to institute some way of encouraging or making it a statutory requirement thatall MFIs report to the CRB in order to provide information to financial service providers concerning
an individual’s payment history. Alternatively, countries can also develop national credit bureaus
which could possibly be housed at the central bank and would serve the same purpose.
6.5.3 Sharing MNO infrastructure
For this challenge, participants recommended that governments should provide subsidies to assist in
the sharing of MNO infrastructure, to establish MNOs in rural areas and to provide MNOs withincentives to operate in these rural areas, provided there is a business case and a critical mass for the
MNOs to make a reasonable return.
6.6

OTHER CHALLENGES

6.6.1 Resource limitations for MFIs
The lack of resources in the microfinance sector was identified as a challenge. Participants
recommended that mergers and acquisitions should be promoted so as to make use of economies ofscale in underwriting capacity where this can be done. Secondly, MFI associations should partnerwith developmental institutions to establish revolving funds that can be accessed by MFIs. Thirdly,
governments can also set aside funds to be channelled to MFIs to achieve specified objectives (suchas the development of the SME sector) so that MFIs can on lend these funds to their clients and toestablish revolving funds for technical support, as well as to fund literacy campaigns in member states.
The training participants also recommended that moral suasion can be used to get commercial banks
to set aside funds to be used for the development of the microfinance sector.
6.6.2 Lack of research
The lack of research by member states was identified as another challenge. Participants
recommended that COMESA should facilitate more research in best practices, product development
and regulation in the microfinance sector. Participants also suggested the establishment of an
information exchange hub, as well as a fund for innovation and product development. Lastly,
participants recommended that COMESA establish a research institute that will be involved in
identifying projects for poverty alleviation which would be one of the institute’s research focus areas,amongst others.
6.6.3 Poor financial literacy and capability
Participants recommended that national financial literacy strategies should be developed in all
COMESA states with the involvement of all key stakeholders. The national strategies would be
implemented utilising already established education training facilities to build capacity in different
areas.
6.6.4 High rates of financial exclusion with respect to women and youth
Participants felt that the rates of financial exclusion with respect to women and the youth were toohigh. To address this challenge, the training participants recommended that governments introduce
targeted access schemes and affirmative action schemes; provide incentives to MFIs such as tax
rebates and guarantees; so that marginalised groups can be better served. Participants also suggested
that capacity building schemes be put in place so as to (1) improve levels of financial literacy so thatmarginalised groups can carry out enterprising activity and (2) promote the formation of groups toenable marginalised groups access finance. Participants also recommended establishing quotas forawarding government tenders to these segments (women and youth).

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6.6.5 Poor repayment culture resulting mainly from political interference
Most member states suffer from relatively low repayment rates. This results mainly from politicalinterference and the tendency to forgive debts for political mileage. Furthermore, when borrowers
think the loans are from government, there is the belief that these loans do not have to be repaid. The
participants’ recommendation to deal with this challenge was that governments should not intervene
directly but should provide loans through financial intermediaries. Participants also recommended
that awareness campaigns be held for politicians to sensitise them as to the detrimental impact of debt
forgiveness, the future harm to repayment levels and, ultimately, the sustainability of affectedfinancial institutions. It was also mentioned that in some countries, politicians’ track records when it
came to loan repayment could be much improved. Malawi had dealt with this challenge byprohibiting politicians from borrowing from financial institutions and only permitting politicians to
obtain loans from Parliament.
6.6.6 Politicians (governments) inability to identify opportunities that will help in theeradication of poverty
Participants recommended that member state governments form strategic partnerships with
development institutions, research organisations, etc and engage in consultative forums to improvetheir capacity to identify opportunities for poverty alleviation. In this manner, governments can put inplace a framework to deal with this challenge. Participants also acknowledged that there was a needto promote a culture of research, knowledge seeking and public consultation when developing policy.
6.6.7 Poor (hard) infrastructure (energy, roads etc)
Participants recommended that the Ministry of Finance in each of the member states should, incooperation with other ministries, develop infrastructure. This is one of the main functions ofgovernment. Alternatively, infrastructure development can be done through strategic public private
partnerships (PPPs). There may be a place for regulators to take on a developmental role to facilitate
technological advances in the financial sector.

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7

COUNTRY ASSESSMENTS

7.1

INTRODUCTION

This section highlights the member states level of development with specific reference to theirmicrofinance regulatory framework. The focus is on the major issues presented and discussed foreach country during the training. The assessments were based mainly, therefore, on information
provided by the training participants. Three levels of microfinance development were created for the
purpose of the assessments, Level 1 (most developed), Level 2 (a lot of progress has been made) andLevel 3 (the least developed). The characteristics of the different levels are shown in Table 7-1.
Table 7-1: Descriptions of the different levels
Description

Level 1

Level 2

Level 3

(Most advanced)(Made progress)(Least advanced)

1

Microfinance policy

No need to develop
national policy on
microfinance – it isalready in existence

Need to develop/revise
national policy on
microfinance

Probably do not have anational policy on
microfinance and oneneeds to be developed

2

Existing
laws/regulations on
microfinance

Existing
laws/regulations on thewhole promote financial
inclusion

Existing
laws/regulations hinder
financial inclusion

Laws/regulations hinder
financial inclusion or arenonexistent3

Supervisory practices

Current practices
promote financial
inclusion, little action
required

Current practices on thewhole promote financial
inclusion, somerevisions needed

Current practices hinder
financial inclusion,
fundamental/significant
changes needed

4

Technical capacity of
regulators/supervisors

High, not much training
required

Medium to high, sometraining required

Low, a lot of training
required5

Existence of otherrelevant support (soft)
infrastructure, such as
the existence of national
identification cards,
national credit
register/CRBs, collateralregistries, etc

Highly developed, inexistence

In existence

Barely exists

7.2

THE COUNTRY ASSESSMENTS

This section explains the manner in which the assessments were arrived at. The resulting
categorisations are presented in Table 7-2. The Comoros and Swaziland’s level of development wasassessed at Level 3, Level 3 being the least advanced. Burundi, the DRC, Egypt, Ethiopia,
Madagascar, Malawi, Sudan, Zambia and Zimbabwe were at Level 2, a lot of progress had been madein developing the regulatory framework but more still needed to be done. Lastly, Kenya, Rwanda andUganda were at Level 1, meaning these countries had made the most advances in developing theirregulatory frameworks for microfinance. What follows is an explanation of why the countries havebeen classified as they have.

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Table 7-2: Country microfinance development categorisation
Level 3

Level 2

Level 1(least advanced)(made progress)(most advanced)



Djibouti

Burundi



Kenya



Comoros

DRC

MauritiusEritrea



Egypt



Rwanda



Libya



Ethiopia

Uganda

SwazilandMadagascar



Malawi

Seychelles



Sudan



Zambia

Zimbabwe

Source: Consultant’s analysis. Those countries shown in italics were not represented at the training.
7.2.1 Level 1 countries
Kenya
Kenya has a well developed regulatory framework for its microfinance sector. In addition, it appears
to adopt the right approach when developing policy and legislation. The regulatory authorities arewilling to listen and embrace new ideas. The regulators employ a “light touch” when innovations andnew products are introduced onto the market. This attitude was exemplified with the regulators
response to the introduction of mobile banking. The challenges highlighted by the training
participants revolved around balancing a prudent regulatory framework with financial inclusion,
innovations not yet covered by appropriate regulations and the absence of MFI boards with relevant
experience. These challenges did not appear to have had a significant negative impact on the
microfinance sector. For these reasons, Kenya has been classified at Level 1.
RwandaRwanda has a well developed regulatory framework for microfinance. It appears to have beensystematic in its implementation of the framework, starting with its recognition of the importance of
microfinance in its Economic Development and Reduction Strategy (EDPRS 1 & 2) andestablishment of the National Microfinance Policy in 2006. Since the enactment of the Microfinance
Law, 493 MFIs have been licensed. In the period from 2008 to 2012, Rwanda managed to double thenumber of people accessing financial services from 21% to 42% with a significant coverage of accesspoints in rural areas. This is a significant achievement considering where Rwanda is coming from. It
also appears to have a vibrant mobile banking sector with the number of active mobile money
accounts per 1,000 adults at 262.54 and the value of mobile money transactions at 7.57% of GDP.
For these reasons, Rwanda has been classified at Level 1.
UgandaAs for Kenya and Rwanda, Uganda has been very progressive in its approach to microfinance.
Uganda developed its Microfinance Policy as far back as 1999 and enacted its Micro Finance Deposit-

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Taking Institutions Act in 2003. MDIs are categorised as Tier 3 financial institutions. Uganda isundergoing a consultative process in the development of a regulatory framework for Tier 4 MFIs
which are currently are not regulated. Although only 4 MDIs have been licensed to date, Uganda has
one of the most vibrant and successful microfinance industries in Africa. For these reasons, Uganda
has been classified at Level 1.
7.2.2 Level 2 countries
The countries classified at level 2 are Burundi, the DRC, Egypt, Ethiopia, Madagascar, Malawi,
Sudan, Zambia and Zimbabwe. All these countries have microfinance policies and microfinanceregulatory frameworks. They have not, however, made as much progress with respect to agency andor mobile banking as those countries which have been classified at Level 1. Financial access is still
relatively low as compared to the Level 1 countries and there is some room for improvement before
they are considered Level 1 countries. It is for these reasons that these countries have been classified
at Level 2.
7.2.3 Level 3 countries
Two countries were assessed as being at Level 3. These were the Comoros and Swaziland.
The Comoros
Although the Comoros enacted its first microfinance law as far back as 2004, changes in theregulatory framework with the enactment of the Banking Act in 2013 have resulted in a number ofadverse impacts on the microfinance sector, the main ones being the minimum capital requirement
being set too high for MFIs currently operating in the sector and the time frame for compliance with
the new provisions having been set too short. Additionally, the introduction of biometricidentification cards which is now the only acceptable form of identification but of which only alimited number have been issued to date and the removal of the tax exempt status of MFIs are having
a detrimental effect on the microfinance sector. For these reasons, the Comoros has been classified at
Level 3.
Swaziland
Swaziland does not have a nationally approved policy for microfinance as yet but there is a draft inplace. Neither does it have microfinance laws. It does have, however, the Financial Services
Regulatory Authority (FSRA) Act of 2011 which provides for the legal framework for regulating andsupervising the activities of NBFIs. Even though the FSRA Act was enacted in 2011, the Act has notbeen fully implemented and the FSRA is still not fully operational. One of the areas of responsibility
affected is the supervisory function which has still not started. For all intents and purposes, therefore,
there is no effective supervision of microfinance in Swaziland. It is for these reasons that Swaziland
has been classified at Level 3.

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8

STRATEGY FOR THE EFFECTIVE REGULATION OF MICROFINANCE
INSTITUTIONS

8.1

INTRODUCTION

Arising from the training, objectives and strategies were developed. The objectives and strategies are
aimed at addressing the challenges that were identified in microfinance development in the COMSEA
region. These were grouped into six categories as listed below:
1)
2)
3)
4)
5)
6)

A regulatory framework that promotes financial inclusion;
Regulators/supervisors with advanced technical capacity/knowledge;
MFIs with the institutional capacity to meet their mission in a sustainable manner;
Research and development that is current and relevant;Enlightened politicians and government officials; andEffective coordination between regulators and other government agencies

What follows is a brief overview of what is involved in accomplishing each of the six objectives.
This section then goes on to provide two major considerations for strategy implementation after which
detailed guidelines for implementation, evaluation and monitoring can then be drawn up.
8.2

A REGULATORY FRAMEWORK THAT PROMOTES FINANCIAL INCLUSION

8.2.1 Reviewing the legal provisions
Achieving this objective will require a comprehensive review of the regulatory framework. The useof regulatory impact assessment (RIA) will greatly assist in this process. All laws that have a direct
bearing on the microfinance sector specifically and the financial sector generally (for instancemicrofinance laws and supporting regulations and directives, the payment systems acts and thefinancial intelligent acts), will need to be reviewed. The aim is to review all provisions thathave/might have an effect on financial inclusion and this can only be done by looking at the laws andregulations provision by provision.
The provisions that are identified as having a negative effect on financial inclusion can then be
repealed/revised. To maximise the outcome, MFIs should be categorised and “tiered”. In this manner,
it will then be possible to ensure the right regulatory/supervisory approach is applied to the MFIs
based on its categorisation, i.e. which tier it is in.
As stated above, this would require a comprehensive review of the regulatory framework. During thetraining, specific matters were highlighted. These matters related to: the removal of interest rate caps;
ownership structures; financial crisis resolution; the disclosure of information by MFIs (transparency);
and the existence of supporting institutions (such as CRBs and collateral registries). The strategies tobe taken are listed in Table 8-1.
8.2.2 Supervisory practices
Similarly, supervisory practices (systems and procedures), most of which emanate from the legal
provisions, will also need to be reviewed. Supervisors are implementers of the law. So once the laws
have been revised, supervisory practices will also have to be revised in line with the (subsequent)changes in the laws and regulations.
Over and above the practices that arise from the legal provisions, there are those practices (in relation
to administration for example) that have more to do with how the supervisors go about doing things(which may not have been stipulated in law) that will also need to be reviewed as these may(inadvertently) have a bearing on financial inclusion (albeit indirectly). An example of this is thelength of time it takes the supervisor to grant approvals where approvals are required by law (forbranch opening or the introduction of new products, for example). The longer it takes for approvals tobe granted, the more expensive it is for MFIs to operate. This cost will either be passed on to
consumers, making access to financial services more expensive and less affordable, or make it very
difficult for MFIs to operate sustainably (Table 8-2).

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8.2.3 The effective regulation/supervision of all MFIs as appropriate
To achieve this objective, an analysis of the MFI sector will need to be undertaken to identify MFIs
that should be regulated and supervised and the type of regulation/supervision appropriate for eachcategory of MFIs. For instance, DT MFIs should be prudentially regulated/supervised whereas NDTMFIs should not. As such, some legal provisions for DT MFIs will not be appropriate for NDT MFIs.
In as a much as regulators/supervisors want to protect the public, even if it is simply from being
exploited and bad business practices, regulators/supervisors still need to be conscious as to whether
the costs of regulating/supervising justify the benefits. This categorisation becomes very important
especially where there are a large number of financial institutions in the microfinance sector which
may be spread over a large geographical area. Four possible approaches, amongst others, wereidentified to achieving effective regulation/supervision and these are highlighted below.
Delegated supervision – this is where the regulatory/supervisory authority delegates regularmonitoring and onsite inspections to a third party but maintains legal authority over, andresponsibility for, the supervised institutions. The third party might be an MFI association, apex
institution58 or an independent technical entity. The regulator/supervisor’s role lies in periodicallytesting the reliability of the delegated agent’s monitoring, inspection and reporting; and intervening in
problem situations.
The adoption of RBS – RBS is an approach to regulation/supervision that focuses the regulator/
supervisor’s attention on those areas that pose the greatest risk to the regulatory/supervisory authority
achieving its objectives. The regulator/supervisor aims to mitigate these risks as far as possible,
taking into consideration the need to use its resources in the most efficient and effective manner.
Outsourcing some functions or employing external experts – this differs from delegated supervision inthat delegated supervision typically will be applied to a whole category of MFIs (i.e. a tier), whereas
outsourcing or employing external experts is more likely to be used on a case by case basis,
depending on the MFI being examined.
Decentralisation of the supervisory function – this is where the regulatory/supervisory authority
establishes more than one branch, especially where the MFIs are spread over a large geographic area.
This option might be preferable where the benefits of establishing branches is higher than having
regulators/supervisors examine MFIs from a central location (usually the capital city)59 (Table 8-2).
8.2.4 The (high) costs of supervision
Regulation/supervision comes at cost. Even where other strategies have been employed to utilise
regulatory/supervisory resources effectively and efficiently, there will always be costs that have to be
met. Where its funding base is limited (or even where it is not), the regulatory/supervisory authority
may need to find alternative sources of income. Thus, to achieve the objective of increasing theincome base to cover the costs of supervision, there may be a case to charge supervisory fees (Table
8-3).
8.3

REGULATORS/SUPERVISORS WITH ADVANCED TECHNICAL KNOWLEDGE AND SKILLSIn any profession, it is imperative that those providing the good or service are proficient in what theydo. This applies to regulators and supervisors as well. Regulators and supervisors need to beknowledgeable about the industry in which they operate, i.e. the microfinance sector. They need to beknowledgeable about the peculiarities of microfinance and what differentiates microfinance fromother financial services, such as ordinary retail banking. Regulators and supervisors need to keep
abreast of developments in the sector, this includes developments in technology and how
technological advances are affecting the microfinance sector.

58 An apex institution is one that typically provides wholesale funding to local MFIs.
59

Some benefits may be intangible and not easy to quantify, e.g. the benefit accrued simply from having a“presence” in generating public confidence in the sector.

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In addition to being knowledgeable, regulators and supervisors need to have the skills to regulate andsupervise the sector. Being knowledgeable, i.e. having the information in and of itself is not sufficient,but being able to apply the knowledge and use it practically when regulating and supervising is also
key. Likewise, having the skills alone is not sufficient as those skills are applied within a context. So
when the regulator/supervisor financially analyses an MFI, the regulator/supervisor must bear in mind
the peculiarities of MFIs to interpret the figures/ratios correctly.
In order to ensure that regulators/supervisors have the requisite knowledge and skills,
regulators/supervisors can be seconded to MFIs to gain firsthand experience, undergo capacity
building programmes on a continuous basis and be required to undertake continuous professional
development (CPD) (Table 8-4).
8.4

MFIS WITH THE INSTITUTIONAL CAPACITY TO MEET THEIR MISSION IN A SUSTAINABLE
MANNER

In order for the microfinance sector to meet the expectations of increasing financial inclusion andcontributing to the alleviation of poverty, MFIs must be financially sustainable. This can be achieved,in part, by having highly skilled staff, well functioning MIS, funding for innovation and productdevelopment and establishing a regional information exchange hub where MFIs can accessinformation covering a wide range of matters (Table 8.5).
With respect to having highly skilled staff, the strategies to be adopted revolved around training andhaving a certification programme in place, as well as ensuring that loan officers were required by law
to carry out an affordability assessment. For the affordability assessments to be done correctly, MFI
staff will have to be trained appropriately.
With respect to well functioning MIS, the regulatory/supervisory authority can identify a suitablesoftware package that can handle MFI operations and produce the required reports and, if necessary,
the regulatory/supervisory authority can subsidise the software’s acquisition by MFIs. A similar
initiative can be undertaken by the MFI association (in conjunction with the regulatory/supervisory
authority) to centrally host a software package which MFIs can then access as and when they need toand only those aspects/components that they require to use at any point in time. The MFI is thencharged a fee according to usage and so does not have to pay for a whole system or its maintenance.
Lastly, with respect to funding, the training participants recommended that stakeholders, such as
COMESA, developmental institutions, governments, donors and, possibly, the MFIs themselves,
should set up a fund that MFIs can access for innovation and new product development.
8.5

RESEARCH AND DEVELOPMENT THAT IS CURRENT AND RELEVANT

The training participants recommended that COMESA should conduct research to determine the levelof microfinance sector development in each of the member states. One of the main reasons for thiswas to determine how much the respective microfinance sectors need to develop before they would all
be at a stage where the microfinance laws could be harmonised. Harmonisation could only becontemplated once there was more homogeneity in the microfinance regulatory framework of all
member states.
In the meantime, COMESA should; develop broad based guidelines/principles for member states toadhere to, facilitate research in best practices, product development and regulation and promote a
culture of research, knowledge seeking and consultation when developing policy. Furthermore,
COMESA should establish a regional information exchange hub where MFIs can access information
covering a wide range of matters. Ultimately, a research institute should be established that will carryout research and development, the results of which will be available to the microfinance sector(through the regional information exchange hub). In addition to the above, one of the institute’s
research focus areas should be poverty alleviation (Table 8-6).

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8.6

ENLIGHTENED POLITICIANS AND GOVERNMENT OFFICIALS

Implementers of legislation, i.e. the regulators/supervisors generally have a significant impact in thedevelopment of the laws for their area of responsibility. However, the regulators/supervisors are notthe ones who make policy or pass the laws, although they will provide input. These are theresponsibilities of government officials and politicians, who in some cases may have knowledge gaps
regarding matters they have to make decisions on. In these cases, it is to the regulators/supervisors
advantage if the government officials and politicians are sensitised to these matters and their impacts.
The regulator/supervisor can take the initiative by holding seminars/workshops to cover relevant
topics, specifically microfinance, the effects of interest rate caps and debt forgiveness and possibly
poverty alleviation (Table 8-7).
8.7

EFFECTIVE COORDINATION BETWEEN REGULATORS AND OTHER GOVERNMENTAGENCIES

It is important that regulatory/supervisory authorities communicate and coordinate their activities
effectively with other government agencies in order to ensure things get done and possibly avoid the
duplication of effort. Effective coordination will (hopefully) ensure that the activities/actions to be
carried out are listed and assigned to the institution ideally suited to undertake that activity within themember states institutional set up. Although the regulator/supervisory authority may not be in aposition itself to get this done, it can initiate the conversation through the ministry it falls under as it
relates specifically to its areas of concern, specifically financial inclusion, consumer protection in thefinancial sector, financial literacy and financial stability (Table 8-8).
8.8

STRATEGY IMPLEMENTATIONCOMESA has 19 member states. Each member state is at a different level of development withrespect to its microfinance sector. Furthermore, a member state might be developed in one area andnot another, for example it might be developed with respect to its regulatory framework for agency
banking, but not actually have any agency banking taking place. So from a strategy point of view,
there would be no need to put in place agency banking regulations, it already exists. Similarly, as
indicated in Section 8.1, the objectives identified were based on the challenges presented in theworkshop. Some member states may experience a specific challenge to a larger extent than anothermember state. So the focus for each member state will be different.
The strategies highlighted in this section have not been developed with specific reference to any
particular country. Nor can it be assumed, for the reasons stated above, that the strategies will havegeneral applicability. When it comes to implementation, therefore, the general principle will be thateach strategy will have to be considered on a country by country basis. The following are
considerations that will need to be taken into account in the implementation process.
8.8.1 Different levels of microfinance sector development
Each country will have to do an analysis of its current situation with respect to the state of its
microfinance sector. This analysis must be holistic. The analysis is also important to establish thebaseline, i.e. an analysis describing the initial conditions before the start of the programme against
which progress can be measured or assessed or comparisons made. Some strategies may be
applicable and others might not be. The initial analysis will enable each member state to determine
which strategies are applicable and which are not. After this analysis has been done and adetermination made of which objectives should be pursued, it will then be possible to draw up country
specific guidelines for implementation.
8.8.2 Financial sector development programmes
In addition to the level of microfinance sector development, the other major consideration will beother financial sector development programmes in place in each country. Most countries havefinancial sector development programmes in place in which some (or all) of the objectives identified
above are being pursued. Therefore, any implementation of the above strategies will have to be

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considered within the context of financial sector development programmes already in place. Rather
than duplicate efforts, it would be desirable to work with what has already been put in place. Ideally,
the strategies documented here should be used to fill gaps where they exist.
Once the initial analysis has been done and country specific strategies have been identified, an
implementation programme can then drawn up accompanied by detailed guidelines for
implementation, monitoring and evaluation.

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103

Enact provisions that promote
financial inclusion

Ensure compliance







Repeal of interest rate cap provisions
Enactment of disclosure provisions for interest rates,
charges and fees
Publication of interest rates, charges and fees
Enactment of disclosure provisions for DT MFI
financial statements
Publication of DT MFIs financial statements
Appropriate provisions with respect to ownership(that take into account the different missions of
MFIs, i.e. developmental versus profit
maximisation)
Crisis resolution procedures in place (including
lender of last resort procedures)
Establishment of a collateral registry










Microfinancepractitioners

The Legislature

Financial sector
stakeholders, e.g.
the Ministry of
FinanceEnactment of provisions that promote financial
inclusion

Regulatory/
supervisory bodyImplementing
institution

Short,
mediumand long
term.

Timeframe61

103

This analysis is at a very high level. The specific benchmarks referred to, such as the repeal of interest rate cap provisions, are those that were specifically referred to in the
training. The list is in no way exhaustive. The specificities will depend on the results from the review of the legal provisions governing the microfinance sector for each
COMESA member state.
61
The timeframes are dependent on the laws/regulations that are already in place, the length of time it takes to draft and pass laws and regulations in each member state andthe policies and procedures of the financial sector stakeholders involved in the processes. At this level, therefore, the timeframes given would have to be very general.
62
Regulatory impact assessment (RIA) is an ideal tool for this exercise.

60

Repeal provisions that hinder
financial inclusion

Review laws/regulations62



Review theregulatory
framework
Repeal of provisions that hinder financial inclusion

Performance benchmarks60

ActionStrategy

Objective - A regulatory framework that promotes financial inclusion

Table 8-1: A regulatory framework that promotes financial inclusion

104



Review supervisory functions

Align with legal provisions
promoting financial inclusion

Remove procedures andpractices that do not promote
financial inclusion

Add procedures that will
promote financial inclusion









Review of thesupervisory function

Employment of external experts
Decentralisation of the supervisory function
Supervisory teams with mixed skills, e.g. IT,
accounting, legal, economics, risk management,
etc





Financial sector
stakeholders, e.g.
the Ministry of
Finance
The Legislature







Regulators/
supervisors

Implementing
institution

Regulatory/
supervisory bodyImplementing
institution

Immediate,short,
medium andlong term.



Short,
mediumand long
term.

Timeframe64Timeframe

104

63
Where the changes required involve revisions to the regulatory framework, the timeframes will most likely be medium to long term. Where the changes required arelimited to the supervisors internal processes that are not dependent on any provisions in law, then these can be implemented immediately, so the timeframes would be
immediate to short term (e.g. adoption of RBS, constitution of supervisory teams with mixed skills sets and possibly the outsourcing of functions and employment of external
experts). The timeframe required for the decentralisation of the supervisory function will depend on whether the supervisor already has a branch network or not. Where there
is a branch network in existence, the timeframe will be much shorter than where branches need to be established.
64
The timeframe for implementation depends on whether legal provisions already exist that enable the regulator/supervisor to charge supervisory fees.

Table 8-4: Highly skilled regulators/supervisors

Introduction of supervisory fees

To increase theincome base bycharging supervisory
fees

Explore ways in which
supervisory fees might becharged

Performance benchmarks

ActionStrategy

Objective - To increase the income base to cover the (high) costs of supervision

Table 8-3: To increase the income base to cover the (high) costs of supervision

Outsourcing of functions

Adoption of RBSDelegated supervisionTiered approach to supervision

Performance benchmarks63

ActionStrategy

Objective – The effective supervision of MFIs

Table 8-2: The effective supervision of MFIs

105

A cadre of highly technically skilled regulators/
supervisors
CPD programme for regulators/supervisors in
place




Second regulators/supervisors to
MFIs to gain firsthandexperience

Organise capacity building andtraining programmes forregulators/supervisors

Develop continuous professional
development (CPD) programmes
for regulators and supervisors







To train regulators/
supervisors so thatthey are highly
technically skilled

105

Performance benchmarks

ActionStrategy

Objective - Highly skilled regulators/supervisors




CMI

Regulators/
supervisors

Implementing
institution


Immediateandongoing

Timeframe

106

Providing MFIs withfunding that can beused for innovationand productdevelopment

Establishment of aregional informationexchange hub where
MFIs can accessinformation covering
a wide range ofmatters4

Ensuring MFIs havewell functioning MIS

2

3

Training MFI staff sothat they have theminimum skills
required to operate in
MFIs effectively

1

Indentify an MIS that can beused by MFIs and subsidise thecost of acquisition if necessaryThe MFI association (together
with the supervisory authority)
can host an MIS centrally

Establish a fund for innovationand product development

Establish an informationexchange hub









Training of loan officers
Certification of MFI staff (e.g.
by an MFI association)
Enact provisions requiring
affordability assessments to bedone by MFIs before granting
loans





















106

Information exchange hub in place

Fund in place

MIS identified and acquired by the microfinanceassociation
MIS have access to the system

MIS identified and acquired by the regulator/
supervisor
MIS installed in MFIs willing to use the package
Trained MFI staff to use the MIS

Certification programme in place
Trained loan officers
Affordability provisions enacted and complied
with

Objective – MFIs with the institutional capacity to meet their mission in a sustainable manner
Strategy
ActionPerformance benchmarks

Table 8-5: MFIs with the institutional capacity to meet their mission in a sustainable manner





















Government
COMESA
DonorsDevelopmentalorganisations
Microfinancepractitioners
COMESA

Regulator/supervisor
Microfinanceassociation/ network

Regulators/
supervisors
MFI practitioners
CMI
Financial sector
stakeholders, e.g. theMinistry of Financeand the Legislature
Regulators/supervisors

Implementing institution











Short term
to medium
term

Short term
to medium
term

Short term
to medium
term

Short term
to medium
term

Immediateandongoing

Timeframe

107

Establish the level of microfinancesector development in member
statesDevelop broad based guidelines/
principles

Establishment of a research
institute and regional informationexchange hub where MFIs canaccess information covering a wide
range of matters

1

2

3

Strategy

Establish a research instituteEstablish an information exchange hubFacilitate research in best practices, in productdevelopment and regulation in the microfinancesectorPromote a culture of research, knowledge seeking
and public consultation when developing policy





107

Conduct research in regions where laws havealready been harmonised, e.g. West Africa

Develop broad based guidelines/principles whichcountries should adhere to

















Conduct a study on the level of microfinancedevelopment in COMESA member statesCall for papers

Research in bestpractices, in productdevelopment andregulation in the
microfinance sector

Research paper andrecommendations on
the harmonisation of
microfinance laws in
the region

Regional
informationexchange hub inplace

Research institute in
place

Broad based
guidelines/principles













COMESA

COMESA

COMESA

COMESA

COMESA

COMESA

COMESA

Implementing
institution

Study report on thelevel of microfinancedevelopment

Performancebenchmarks

ActionObjective – Research and development that is current and relevant

Table 8-6: Research and development that is current and relevant















Ongoing/
short term

Ongoing

Short term

Short tomedium term

Short tomedium term

Short term

Immediate toshort term

Timeframe

108

Form strategic partnerships with development
institutions, research organisations, etc and engage
in consultative forums to improve their capacity toidentify opportunities for poverty alleviation

To equip politicians andgovernments officials with theskills to identify poverty
alleviation opportunities

108

Coordinating unit/
function in placeEstablish structures to ensure theeffective coordination between
regulators/ supervisors andgovernment agencies

Setting up of coordinating unit/function for
financial sector stakeholders involved in theimplementation of financial inclusion, consumer
protection, financial literacy and financial stability
strategies

Performancebenchmarks

Strategic
partnerships inplace

Seminars/
workshops held

ActionStrategy

Objective – Effective coordination between regulators and other government agencies

Table 8-8: Effective coordination between regulators and other government agencies

Sensitise politicians and government officials of the
detrimental impact of debt forgiveness

Sensitise politicians andgovernment officials as to thedetrimental impact of debt
forgiveness2

Seminars/
workshops held

Sensitise politicians and government officials on theadverse effects of interest rate capsSensitise politicians andgovernment officials as to theadverse effects of interest rate caps

Performancebenchmarks

Action1Strategy

Objective – Enlightened politicians and government officials

Table 8-7: Enlightened politicians and government officials

Government
departments

Regulator/
supervisor

Regulator/
supervisor



Financial sector
stakeholders

Implementing
institution







Implementing
institution

Immediate
and ongoing

Immediate
and ongoing

Immediate
and ongoing

Short term to
medium term

TimeframeTimeframe

9

SUMMARY AND CONCLUSION

This report provides a record of the training proceedings and discussions of the capacity building
training for central bank officials and microfinance practitioners, Microfinance Training Course for
Policy and Development held from 2 December 2015 to 8 December 2014 in Lusaka, Zambia. The
training focused on developing human capital, mainly in the regulation and supervision of
microfinance, identifying challenges in the COMESA region and how these challenges can be dealt
with from a regulatory and supervisory perspective.
Over the 7 day period over which the training was held, participants shared a wealth of knowledge
with respect to the level of development of the microfinance regulatory framework within theirrespective countries. Because of the potential of mobile/agency banking, a number of sessions werefocused on the regulatory framework for this subsector specifically, including a case study of Rafiki
Microfinance Bank and a panel discussion with Burundi, Rwanda and Kenya represented on the panel.
Mobile banking has the potential to significantly impact financial inclusion in a number of COMESA
countries with the increase in mobile phone subscriptions in the last few years, the lower costs
associated with providing banking services using this delivery channel, amongst other considerations.
The case study and panel discussion clearly demonstrated that there were benefits to leveraging this
sector. Additionally, the case of Kenya in its approach to regulating mobile/agency banking
demonstrated the need for regulators and supervisors to embrace innovation and new products without
being overly heavy handed. Care needs to be taken in developing the regulatory framework so as not
to stifle innovation and the introduction of new products. Consumers’ needs are constantly changing,as is technology and the market place. It is important that the regulatory framework keeps up withthese changes to ensure that it continues to remain relevant.
At a regional level, a number of challenges were identified, prioritised and recommendations made.
Member states were categorised into 3 levels depending on their levels of development of theirmicrofinance regulatory frameworks based in part, on the extent to which they faced the challenges
identified. The recommendations made with respect to these challenges form the basis of strategies
that may be employed at a regional level for individual member states to develop their microfinancesectors.
Recommendations were also made for which COMESA was identified as the key implementing body,such as the establishment of social performance indicators to be adopted by member states and broad
based guidelines/principles to which all COMESA member states should adhere to promote a
minimum level for microfinance regulatory frameworks, as well as a research institute that would be
involved in identifying poverty alleviation projects, amongst other areas of focus.
Lastly, arising from the training, strategies for the effective regulation of microfinance institutions
were developed. The strategies are aimed at addressing the challenges identified in the Region
covering a regulatory framework that promotes financial inclusion, regulators and supervisors withadvanced technical knowledge and skills, MFIs with the institutional capacity to meet their mission ina sustainable manner, research and development that is current and relevant, enlightened politicians
and government officials, and the effective coordination between regulators and other government
agencies.

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10 BIBLIOGRAPHY
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findings. [WWW] Alliance for Financial Inclusion. Available from http://g24.org/wpcontent/uploads/2014/03/Session-1_217.pdf
AFI (2011). Measuring Financial Inclusion: Core Set of Financial Inclusion Indicators. [WWW]
Alliance for Financial Inclusion. Available from http://www.afiglobal.org/sites/default/files/afi%20fidwg%20report.pdf
AFI (2011). G20 Principles for innovative financial inclusion. [WWW] Alliance for Financial
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Appendix 1: Training Sessions
Day 1 - Tuesday, 2 December 2014
Official opening
The training started off with the official opening ceremony with 

Opening Remarks from Ambassador Kipyego Cheluget (Dr), Assistant Secretary General(Programmes) of COMESA;Remarks by Mr. Masayuki Tamagawa, Head of External Representation Office for Asia, African
Development Bank (AfDB Group);Remarks by H.E. Mr. Kiyoshi Koinuma, Japanese Ambassador to Zambia, Fund for Africa
Private Sector Assistance (FAPA) Donor Country;Remarks by Mr. George Hara, Chairman of the Board, Alliance Forum Foundation (AFF); andOfficial opening statement by Mr. Michael Gondwe Governor of the Zambian Central Bank, theBank of Zambia (BoZ)

Day 1 Sessions
The opening ceremony was followed by Day 1 sessions. The overarching objective of the sessions
was “to deepen the understanding of the role of regulation and supervision in inclusive
finance/microfinance”. The first session “Microfinance and Public Interest Capitalism” was conductedby Mr. George Hara. This was followed by 3 sessions conducted by Cheryl Frankiewicz. The day
ended with a session conducted by Masayuki Tamagawa. Day 1 sessions and a summary of what wascovered are highlighted in Table 1. The presentation slides can be found in Appendices 2, 3 and 4
respectively.

Table 1: Day 1 Sessions
Day 1 Objective - Opening and introduction to financial inclusion
1)Microfinance and public interest capitalism, Mr. George Hara (Appendix 2)
The lectured explored the application of the Public Interest Capitalism (PIC) paradigm in financial inclusion
policies in the COMESA region. PIC is a new economic approach that commits to including the poor into
economic growth, thus building a sound and firm middle income class in national economies
2) The financial lives of the poor: Why connect low income households with formal financial services? Cheryl Frankiewicz (Appendix 3)A) Defining the difference between microfinance and any other kind of financeB) A discussion of how low-income households manage their financial lives without access to formal financial
services and why access to formal financial services would be beneficial
3) The evolution of microfinance: How well has the low income market been served by formal financial
service providers to date? - Cheryl Frankiewicz (Appendix 3)A) Overview of the history of microfinanceB) Mark Schreiner’s six degrees of outreach framework4) The role of regulation and supervision in making financial markets work for the poor Cheryl Frankiewicz (Appendix 3)A) An introduction of the concept of a microfinance ecosystem followed by a discussion on the role of

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regulation and supervision within that systemB) A look at the rationale for a core set of regulatory objectives for microfinance (i.e., promoting safe and soundfinancial service providers, guarding against systemic risk, protecting consumers, establishing a competitivemarket and improving access) and exploration of which of the six degrees of outreach each objective helps
expand6) Basic issues for building regulatory and supporting systems for microfinance and cases from Japanin the system development - Masayuki Tamagawa (Appendix 4)
A discussion of the basic issues for building legal regulatory and supporting systems for microfinance and an
exploration of present cases and experiences of microfinancing business in Japan, the various types of financial
business involved in microfinance as well as the regulatory framework governing microfinance business androle of public sector to support lending to small and medium enterprises (SMEs) and poorer people.

Day 2 - Wednesday, 3 December 2014
Day 2 had one session facilitated by Kimanthi Mutua. The session’s main objective was to review
and discuss fundamental aspects of microfinance regulation and supervision. The session was basedon the CGAP 2012 publication – “A Guide to Regulation and Supervision of Microfinance Consensus
Guidelines” and was divided into 2 components; (1) Preliminary issues and (2) Prudential regulationof deposit taking microfinance. Component 2 was further broken down into 4 topics. The aim andthe contents covered in this session are summarised in Table 2. A more detailed account can be foundin Section 4.
Day 3 - Thursday, 4 December 2014
Day 3 consisted of COMESA country presentations and the session was facilitated by Cheryl
Frankiewicz and Kimanthi Mutua. The objectives of the session were to:1) Present the current status of microfinance regulation and supervision of each state in comparison
to “international best practices”;
2) Address the challenges and issues of microfinance regulation and supervision in the COMESA
region; and
3) Explore how the lessons learnt from individual country experiences/cases shared in this training
can be applied to the other COMESA member states.
Table 2: Day 2 Session objectives and contents summary
Session Summary - This session was based on the CGAP 2012 publication –“A Guide to Regulation andSupervision of Microfinance Consensus Guidelines” which was used to guide the discussion and review
regulatory and supervisory issues relevant to formal financial services.
The Guide focuses on the specifics of microfinance regulation and supervision and only addresses the issues andprinciples applicable to financial sector regulation and supervision generally when it is necessary to understandmicrofinance regulation and supervision specifically. The session was aimed at reviewing the guidelines (bestpractices) and the relevance of the guidelines to the COMESA region.
Topic 1 - Preliminary issues and prudential regulation of MFIs
Component 1 - Preliminary issues
The first part covered the basic terms used in the Guide, enabling regulation (regulation whose explicit purpose
is to promote the development of providers and products that serve the financially excluded poor), regulatory
definitions of microfinance and microcredit (which may be different from the definitions of these terms whenused in general discussion) and distinction between prudential and nonprudential regulation of microfinance.
Component 2 - Prudential Regulation of Deposit Taking MFIs
The second part of Topic 1 covered the key features of the prudential regulation of deposit taking (DT) MFIs,

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including; new regulatory windows for depository microfinance, rationing prudential regulation and minimum
capital, adjusted prudential standards for microfinance, transformation of nongovernmental organisations(NGOs) and MFIs into licensed intermediaries and deposit insurance.
Topic 2 – Prudential Supervision Issues in Deposit Taking MFIs
The issues reviewed in Topic 2 were; supervisory tools, enforcement mechanisms and limitations regarding
MFIs; the costs of supervision and the location of the supervisory function for microfinance.
Topic 3 - Nonprudential Regulatory Issues
Topic 3 covered nonprudential regulatory issues including; permission to lend, reporting and institutionaltransparency, consumer protection, credit reporting systems, limitations on ownership, management and capital
structure, NGO transformation into for profit companies, secured transactions, financial crime and tax treatmentof microfinance.
Topic 4 - Regulating the Use of Branchless Banking to Serve the Poora) Branchless banking - a review of regulating the use of branchless bankingb)Agents and other third party arrangements – anti money laundering and combating of terrorism (AML/CFT)in branchless banking, nonbank issuers of e-money and other stored value instruments, consumer protection in
branchless banking, payment systems, regulation and access and interagency coordination,
Branchless Banking - Summary of Key Observations, Principles, and Recommendations

Session Summary
This session built on Day 2’s session by getting participants to share experiences from their own
countries. It also provided the basis for the group work on Day 4 which included presentations fromeach country focusing on three main areas: (i) the current status of microfinance regulation andsupervision; (ii) the challenges of the regulatory and supervisory process; and (iii) a comparative
analysis of the current status and international best practice. The presentations were approximately 15
minutes each and mainly covered the topics raised in the fact sheets participants were asked tocomplete prior to the training. The country presentations are covered in more detail in subsections 3
and 4 of the respective country accounts in Section5.
Day 4 - Friday, 5 December 2014
The day consisted of a field trip to an MFI, Micro Bankers Trust (MBT). The overall objective of thevisit was to learn about MBT’s services and the managerial aspects of microfinance. The first part ofthe day was a visit to the Chongwe branch of MBT followed by a visit to the head office in Lusaka inthe afternoon. The field excursion involved meeting (1) loan officers and receiving two indepth
lectures from MBT key members of staff to gain a better understanding of MBT’s organisation andadministration and the benefits of microfinance from the institution’s perspective (Appendix 5) and(2) clients to learn how microfinance has affected their lives. The field trip included:
1) The observation of a loan repayment meeting followed by a talk by the MBT Loan Officer
regarding repayment plans, screening, challenges in centre management, client retention and otheraspects;
2) A discussion with the Centre Chief regarding loan usage, the impact of receiving loans,
responsibility of a centre chief and challenges that centre faces; and
3) Visits to businesses owned by MBT clients and interviews with the clients to get information onloan usage, the impact of receiving the loan and the challenges in managing the business withloans (Appendix 6).

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Day 5 - Saturday, 6 December 2014
The application of regulation and supervision
The objective of the sessions held on Day 5, facilitated by Kimanthi Mutua, was to gain an
appreciation of the challenges and difficulties faced by MFIs in transforming into regulated financial
institutions and identifying the challenges in the regulation and supervision of microfinance.
Session 1
The first session built on Day 2 and Day 3’s sessions and was divided into 3 parts: Part 1 - commenced with an overview of the critical challenges faced by MFIs following
transformation into a DT and regulated MFI. The overview focused on issues drawn from actual
cases concerning regulatory requirements regarding staff, clients, management and ownership;Part 2 - was a plenary session held to brainstorm and identify challenges in the regulation andsupervision of microfinance; andPart 3–was group discussions to formulate possible solutions and action plans for challenges
selected from the previous part.

Through group discussions and brain storming, the delegates identified challenges and prioritised
them in preparation to developing solutions and recommendations to address the challenges identified.
The outcomes of the group discussions were presented on Day 6 and are documented in Section 6.
Session 2
The second session consisted of a presentation on the “Use of Mobile Money in Microfinance
Services, A case from Rafiki Microfinance Bank” given by George Mbira, Rafiki MicrofinanceBank’s General Manager (Appendix 7). Rafiki Microfinance Bank (Rafiki) is a leading Kenyan
microfinance bank specialising in mobile money products. The presentation highlighted the impact of
the Kenyan Microfinance Regulations on mobile money utilisation and the challenges in ensuring
sustainability. The presentation then outlined recommendations on the way forward. The issues
presented are highlighted in Section 4.6.
Session 3
This was followed by a panel discussion of the regulatory issues in mobile money/banking.
Participants from 3 member states in different stages of mobile money/banking development
discussed the keys of success, challenges and demands from the perspective of mobile money/banking regulations. A detailed account of the issues raised in the plenary session can be found in
Section 4.7.
Session 4
The day ended with group work on developing solutions and recommendations to the challenges
identified in earlier sessions, including those arising from the brain storming and plenary discussions.
Participants were organised into five groups and assigned challenges to address.
Day 6 - Sunday, 7 Dec 2014
The objective of this session was for each group to present their recommendations for the challenges
assigned to them the previous day and have all the participants engage in discussion around what waspresented and give feedback. This was done with the aim of coming up with broad guidelines on theregulation and supervision of microfinance in the COMESA region. The resulting presentations andoutcomes have been documented in Section 6.

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Day 7 - Monday, 8 December 2014
The last day of the training had sessions with the objectives of:1) Summarising key regulatory and supervisory issues;2) Wrapping up and concluding on the way forward; and3) Familiarising the participants with assistant schemes offered by the AfDB.
Session 1- given by Dr Chiara Chiumya, was a summary of the challenges and recommendations
presented on Day 6 (Section 6).
Session 2 – given by Mr Kimanthi Mutua, highlighted the way forward.
highlighted can be found in the Appendix 8:

The main points he

Session 3 – presentation of AfDB’s “Inclusive Growth and Job Creation” Africa micro, small andmedium enterprises (MSME) Program given by Dr Soumendra K Dash from the AfDB (Appendix 9).
The Programme was launched in 2013 after the AfDB identified an estimated funding gap of USD170
billion for MSMEs. The presentation covered the reasons for launching the Programme, who andwhat is being targeted by the Programme and the way forward.
Session 4 – presented by Mr George Hara, covered action plans in financial inclusion along Public
Interest Capitalism.
The training ended with the Closing Ceremony at which each delegate received a certificate duly
signed by the organisers and sponsors.

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Appendix 2: Microfinance and Public Interest Capitalism
Date: December 2, 2014
Lecturer: George Hara, Chairman of the Board, Alliance Forum Foundation

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Public Interest Capitalism
New Industries

Emerging
Countries&

Role of the
OUTSIDE BORAD
MEMBERS

Earth
Customers

To watch every
stakeholders 'interests

COMM
U
-NITY

BORAD
CEO

Emplo
-yees

PM Council on Economic
and Fiscal Policy
Decision on Nov.1,2014

MGMT

Suppliers

Share
Holders

Copyright © 2014 Alliance Forum Foundation All Rights Reserved.
. Interest Capitalism: Public

2

Public Interest Capitalism
New Industries

Emerging
Countries&

Role of the
MICROFINANCE

Earth
Customers

GOVERNANCE
Regulation andFramework
Eg. Interest rate
Delinquency rate

COMM
U
-NITY

BORAD
CEO

Emplo
-yees
MGM
T

Copyright © 2014 Alliance Forum Foundation All Rights Reserved.
. Interest Capitalism: Public

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Suppliers

Share
Holders1

Analysis of Trends for Capitalism in the U.S. （2）• Trend of inflated compensation for management team driven by the alignment of interest with shareholders

10

売り上げ上位５０社のCEO報酬中央値
MedianCompensation of CEOs of top 50 companies in U.S. by revenue
インフレ調整済み(adjusted for inflation)

8
２０００年
百万ドル

millions$

6
4
2
0• Although profits are rising, median compensation is actually decreasing

Median Compensation of average male in 30s

Copyright © 2014 Alliance Forum Foundation All Rights Reserved.

AFDP Microfinance Courses••••

Microfinance Services for the Poor launched in Bangladesh in
September 2009
Aims to foster microfinance professionals, CEOs, CFOs and business Leaders indeveloping world
Bringing Public Interest Capitalism Model to Developing Nations
Over 200 people across the globe graduatedSir. Fazle Hasan Abed
Founder of BRAC

Dr. Muhammad Yunus
Founder of Grameen
Bank

Co-organized by :Ambassodor George Hara
Chairman of the Board of Directors

Cooperating Organizations:2

Copyright © 2014 Alliance Forum Foundation All Rights Reserved.

1191

Microfinance
Promote Self‐reliance and Empowerment

Support economic independence and self‐reliance of the people through improving;

Access tocapital• Start up their own business using microcredit

Access totraining• Scale up and capacity building for the poor
• A variety of trainings to be coordinated with
JICA,NGOs in vocational education and otherareas

Access tomarket• Teach how to reflect the commercial value• Export strategy, (distribution channel ie 7eleven)• Branding ie AFF UN ECOSOC Organic
Certificate

Copyright © 2014 Alliance Forum Foundation All Rights Reserved.

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2

Photo credit: Anne Wangalachi/CIMMYTAppendix 3: The financial lives of the poor - why connect low income households with formal
financial services?
Date: December 3, 2014
Lecturer: Cheryl Frankiewicz

Six reasons why low-income
households need financial services
more than you do…
4

Reason #1
You are already part of the financial system, but most lowincome households are not.

5

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Reason #2
Their low, irregular and unpredictable incomes make it
difficult to finance even a basic level of consumption.

Source: “Innovative Financial Inclusion: Principles and Report on Innovative Financial Inclusion from6
the Access through Innovation Sub-Group of the G20 Financial Inclusion Experts Group.” 25 May, 2010

Copyright © 2014 COMESA, AFF, EADI All Rights Reserve d.

Reason #3

Photo credit: Family International

With lower incomes and limited assets, they have fewer
resources with which to cope with a crisis.

7
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

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122

Reason #5
The consequences of not having access to financial
services are more severe; low-income households need toprotect what little they have.

9
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

Why connect low-income
households with FORMAL
financial services?

6
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

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123

+RZ"

+RZ"

7
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

Six degrees of outreach
How many people
are served?

BreadthLength

Depth

Worth

Scope
Cost

Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

124
124

Measuring BREADTH

Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

Six degrees of outreach
How well are poorer
or more marginalized
segments served?

BreadthLength

Depth

Worth

Scope
Cost

Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

125
125

Measuring Depth

Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

An example from Rwanda

Source: FinScope, “Financial Inclusion in Rwanda 2008-2012”23
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

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126

Measuring SCOPE
 Number of product lines offered Variety of products in a product line Range of products actually used in the pastyear

25
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

Measuring SCOPE

Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

127
127

Measuring SCOPE

Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

Measuring COST
 Average cost of opening a basic current account Average cost of maintaining a basic bank current
account

 Operating efficiency of financial service providers

16
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

128
128

Measuring COST
 Average cost of opening a basic current account Average cost of maintaining a basic bank current
account

 Operating efficiency of financial service providers
 Time / money to reach nearest access point

17
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

Measuring COST

18
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

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129

Measuring COST
 Average cost of opening a basic current account Average cost of maintaining a basic bank current
account

 Operating efficiency of financial service providers
 Time / money to reach nearest access point APR of loan products

19
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

Measuring COST
 Average cost of opening a basic current account Average cost of maintaining a basic bank current
account

 Operating efficiency of financial service providers
 Time / money to reach nearest access point APR of loan products
 Premium payments on insurance products

39
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

130
130

Measuring COST
 Average cost of opening a basic current account Average cost of maintaining a basic bank current
account

 Operating efficiency of financial service providers
 Time / money to reach nearest access point APR of loan products
 Premium payments on insurance products

 FULL cost from client’s perspective will include
financial, transaction and opportunity costs
41
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

Measuring WORTH Renewal / retention rates
 Usage rates (e.g., zero deposits/withdrawals ina typical month) Client satisfaction rates

43
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

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Measuring WORTH Renewal / retention rates
 Usage rates (e.g., zero deposits/withdrawals ina typical month) Client satisfaction rates
 Portfolio-at-risk (for loan products)

23
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

Measuring WORTH Renewal / retention rates
 Usage rates (e.g., zero deposits/withdrawals ina typical month) Client satisfaction rates
 Portfolio-at-risk (for loan products)
 Interoperability of ATM/POS Existence and enforcement of consumer
protection legislation
24
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

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132

Measuring WORTH

Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

Six degrees of outreachHow sustainable
are the services
offered?

BreadthLength

Depth

Worth

Scope
Cost

Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

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Measuring LENGTH
Data from Microfinance Institutions that Report to the Microfinance Information Exchange (MIX)Medianvalues bycountry
BurundiDRC
Egypt
Ethiopia
Kenya
Madagascar
MalawiRwandaSwaziland
UgandaZambiaZimbabwe

COST
WORTH
LENGTH
Operating Operating Portfolio Capital/ Debt /expense/ expense/ loan at risk >asset
equity Return on Return on Risk
assetsportfolio
30 daysratio
ratio
assetsequity coverage
17.7%
34.3%
6.2%
37.2%
1.7
3.3%
10.4%
78.2%
26.8%
45.8%
11.2%
17.9%
2.6
0.8%
1.1%
71.6%
14.3%
23.4%
2.7%
76.1%
0.31
8.4%
12.6% 100.0%
11.2%
13.5%
0.9%
34.3%
1.92
5.4%
12.5%
69.2%
19.7%
33.3%
6.4%
26.4%
3.38
1.3%
5.8%
54.7%
19.0%
28.0%
4.6%
21.4%
3.715
0.9%
3.8%
74.1%
37.5%
75.8%
7.1%
46.8%
2.46
-1.2%
-2.5% 150.3%
18.2%
27.1%
8.8%
31.4%
2.18
0.9%
0.3%
48.4%
6.1%
6.4%
30.0%
2.33
1.4%
4.2%
28.4%
44.9%
3.9%
35.0%
1.85
1.8%
5.2%
75.1%
51.9%
75.3%
2.6%
56.4%
0.77
-5.4%
-11.2% 123.4%
23.2%
27.6%
9.6%
30.4%
2.29
11.8%
45.7% 103.2%
Source: www.mixmarket.org

53
Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

Activity by country
1. In which dimension is your country’s
outreach relatively strong? (green card)
2. In which dimension is your country’s
outreach relatively weak? (red card)
3. Why is outreach weak in some areas? (oneidea per post-it card)

Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

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Activity in mixed groups Discuss the following question:± How can regulation and supervision help address
the challenges on the wall?

 Write each idea you have on a separate arrow Post each arrow on the wall so that it aims at
the challenge it will help address

Copyright © 2014 COMESA, AFF, EADI All Rights Reserved.

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135

www.akdn.org

59

Appendix 4: Laws, Regulations and Support Systems for the Foundation of Microfinance
Date: December 2, 2014
Lecturer: Masayuki Tamagawa

I.
Basic Issues for Building Legal Regulatory and Supporting Systems for Microfinance
1. What is microfinance?
• Loan or relevant financial services provided by institutions (including for credit‐granting andfinancial institutions) for small and medium enterprises and poor••

Borrowers
 Small and medium enterprises doing business Individuals doing business Individual farmers
 Individuals not doing business – consumer lending
Characteristic of loan
 Small scale Relatively low interest
 Offered without collaterals Offered to poor or those who have low credibility

2. Public Value of Microfinance• Contribute to financial inclusion by offering loans to those who cannot usually obtain loans frombanks, the center of the financial system• Microfinance may also involve provision of knowledge and techniques or technical support forborrowers to ensure that they can pay back
 Plan and implement reasonable expenditure consistent to (potential) income
 To bring business success
3. Diversity of financial institutions involving in microfinance1) Banks offering loans for small and medium enterprises or consumers• Banks do this business as a part of overall financial service• Or banks establish institutions specializing in microfinance within their subsidiaries
2) Private institutions (not banks) offer loans and accept deposits• Credit cooperatives• Agricultural cooperatives• Recognized microfinance banks3) Moneylenders who offer loans using their own money• Regular business (for profit making)• For charity (NPO Bank)
4) Loans from public institutions or sector• Loans offered by government‐owned (public) financial institutions• Loans offered by local governments
5) Provision of additional financial services• Remittance• Insurance• Equity participation etc.
4. Relationships with laws and regulations governing activities of financial institutions• Relationship with laws and regulations on bank supervision
 Banks ˜ deposit taking financial institutions
 Protection of depositors– Authorization of establishment, supervision and investigation for soundness by
the central banks or financial supervisory authorities

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•

– Maintenance of equity or own capital– Regulations and supervision to secure sound financial conditions and activities
Relationship with regulations on moneylending business Registration system (less strict than authorization or special permission system) to startbusiness in many countries
 Prevention of extreme, violent or illegal debt collection
 Place a limit on interest rates and the maximum amount of debt per borrower to prevent
excessive indebtedness and protect such debtors
 Regulations to maintain social credibility including minimum equity or own capital andno criminal record or relationship

5. Laws and regulations to implement microfinance business in appropriate and smooth manner
Common regulations on bank supervision and moneylending can be amended or fine‐tuned according to
the characteristics of microfinance(1) Cooperative institutions by joint ownership of “members”• Mitigate or relax the conditions of establishment• Applying the necessary parts of the Banking laws
• Delegate the power to permit or right of supervision to other ministries or local
governments• Limitation on the scope of business activities(2) Special laws on microfinance banks• Joint‐stock corporations can establish• Permit to accept deposits and other type of investments from depositors special type ofinvestors or general public• Mitigate or relax the conditions of establishment and authorization(3) Regulations to recognize and encourage moneylending for non‐profit and charity
Differentiate from regular moneylending business for profit• Mitigate or relax a part of regulations• Use of self‐regulatory organizations
6. Support for microfinance from public sector institutions(1) Business under direct management• Loan business by the central government including through public financial institutions
specialized in lending to small and medium enterprises, etc.
• Direct investment by the central government and guarantee offered for repayment ofdebts of such financial institutions(2) Direct supporting• Subsidies, tax scheme or other preferential treatments(3) Two‐step loans to microfinance institutions• Ex: AfDB scheme for two step loans to (or through) microfinance banks with TA (fundedby FAPA)(4) Technical supports for recognized microfinance institution• TA to microfinance institutions and borrowers• Technical guidance through industrial associations• Introduction of successful cases and models
II. Introduction of the Cases and Experiences of Microfinance Business in Japan
1. Depository Institutions and MicrofinanceBanks – 140 in total including 3 Megabanks• Regional banks
 64 members in the Regional Banks Association of Japan• Second‐regional banks
 41 (former Sogo‐Bank – mutual loan corporation)
Shinkin‐Bank – 271

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• Cooperative financial institutions under the direct supervision of the Ministry of Finance• Capable of providing financial services like banks’, but not for profit• Lend to 1.13 million enterprises (mostly SMEs)
Cooperative financial institutions• Credit Cooperatives 157
 Mostly for mutual support of members
 Supervision authority moved from prefecture government to FSA in 2000
• Japan Agricultural Cooperatives (JAC), Japan Fisheries Cooperative (JFC) JAC: 11,569 (by 2013)– Individual JAC 2,556 + Confederations 203
 JFC: 6,227 (by 2013)– Individual JFC 2,497 + Regional JFC 1,811 + Confederations 1,919
2. Moneylenders and MicrofinanceMoneylenders• Number of registered moneylenders in Japan: 2,113 (by 2014 March) Highest number of moneylenders was 30,290 (by March 1998)• Many of the moneylenders were screened and disappeared as the law becomes stricter;some of them became subsidiaries of the larger bank groups• Provide loans with relatively low interest compared to developing countries that areunder strict control of the law that limits the maximum interest rate (20%)
3. Public Financial Institutions funding Small and Medium Enterprises• National Life Finance Corporation
 Loan Outstanding: 7.2 trillion yen
 Lending to 930 thousand enterprises
 On average 6.8 million yen per enterprise 152 branches throughout the nation• Small Medium Enterprise Financial Corporation
 Loan Outstanding: 6.4 trillion yen
 Lending to 47 thousand enterprises
 65 Offices
 Also offers credit guarantee• 145 thousands enterprises• 30.1 trillion yen• Agriculture Forestry and Fisheries Financial Corporation
 Loan Outstanding: 2.6 trillion yen
 48 Office• They were consolidated under the Japan Financial Corporation in 2008
• Originally saving collected from national postal funding was used as major funding source. Now
they issue government guaranteed bonds
4. Supporting systems offered by local governments
1) Support for small and medium enterprises• Based on the recommendation/nomination of the Chamber of Commerce and Industry,banks offer loans with relatively low interest up to standardized limit with terms agreed
with local governments• Local governments deposit funds to financial institutions to offer loan with low interest• Local governments offer support for the payment of interest or provide credit guarantee2) Support for poor
• There is a system to lend money for temporary period for supporting basic life needs
 Those who are eligible to receive such funds:– A family with low income (those who face difficulty in borrowing moneyfrom other institutions)– A family with disability– A family with elderly

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5. New development and movement of microfinance
1) Loan institutions as NPOs
• Moneylending by NPOs specifically to support poor
• They could raise fund by accepting donations or finance through Corporate Social
Responsibility activities
2) Significance of Private Equity (PE) Funds• It is not the regular moneylending that makes profit from interest; rather, it gets profit asa sponsor/an investor from the future growth of business. PE Funds that raise funds forinvesting in SMEs are developing• The role of PE Funds that invest in microfinance institution is significant as well
• There are some PE Funds that accept funds for the cooperation with public objectives or
CSR instead of directly aiming at the realization of high investment return
6. To succeed in microfinance business• The financial services for small and medium enterprises or poor can work as profitablebusinesses. At the same time, they are the business area with high public value contributing tofinancial inclusion.
• Even if they do not aim for profit, they can achieve positive balance capable of covering expenses
while investing to expand their business and to improve their services. They can offer reasonableinterest by not intending profit and by accepting donations, corporate CSR and public funds touse them to reduce the cost of fundraising. This will help heighten the possibility and incentive ofrenters’ repayment.
• Of course, to be successful as financial business, business models should include the knowledge
and techniques or methods to secure the followings to be integrated and implemented:• Careful decision making of investment and lending• Monitoring of investees and borrowers• Ensuring to receive repayment of investment and lending• It is also possible to allow microfinance institutions to accept deposits from their members,
borrowers or general public. In this case, the special attention is needed to consistently andappropriately integrate the characteristics of microfinance into the regulations and the systemsof supervision that are applicable to institutions accepting deposits in order to protect
depositors.
• To decide how prudential regulation for their implementation should work is a significant
challenge for financial regulatory agencies. Financial regulatory agencies usually have only alimited amount of resources. Thus, in case of institutions that do not accept deposits, eachmicrofinance institution is expected to manage the soundness of the business by itself andshareholders are due to assume responsibilities in case of failure. The supervisory agencies also
encourage prevalence of “best practices” by promoting self‐regulation and mutual assistancethrough industrial organizations.

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Appendix 5: Field Excursion; Visit to the local Microfinance Institution in Zambia
Date: December 4, 2014
Lecturer: MicroBankers’ Trust Executive Director

DISCUSSION TOPICS
 Formation and ownership Regulatory environment for MFIs
 Challenges faced
 MBT’s strategic insights
 Conclusion
Formation and ownership
 MBT was created in 1996
 100% owned by the Government
Mission & Vision
Mission ‐ To contribute to the creation of wealth at community level through access to appropriate
financial and other services for enterprise development and self employment by vulnerable groups inZambia.
Vision ‐ To be the best financial services provider to vulnerable population segments in Zambia to build
better lives.
Products and Services
Core products;
 Compulsory Savings
 Tweende loans ‐ Group loans
 Individual loans Agriculture Trading Acquisition of equipment/Assets e.g. hammer mills, ploughs House improvements
Impact and outreach
Since inception MBT has achieved the following: Managed to reach over 114, 000 households
 Branch expansion in rural areas
 Dairy farming – empowered a number of Dairy farmers
 Collaborations with NGO’s and International Institutions to promote poverty programmes. The
organisations include OXFARM, UNDP, DID, IFAD, EU, and HIVOS
Regulatory environment in the MFI industry
MBT is registered and regulated by: BOZBank of Zambia supervision
MBT falls under the Non‐Bank supervisory directorate at BOZ
Recent regulatory developments:
 Interest capping Revision of capital adequacy ‐ from K0.25m to K2.5m
 100% ownership
Challenges faced Irregular funding – MBT’s operations require constant funding Narrow product base – Inability to develop new products Unclear legal status – From Trust to Ltd Company and meet the capital requirement of K2.5
million.
 Competition – New & old Bank of Zambia interest capping ‐ Revenue loss

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Challenges contd.
 High operational costs – remoteness of operational areas Lack of a robust computer system – resulting in; Weak internal controls – pilfering Revenue loss
 Unreliable reports
MBT’s strategic insights
MBT has plans to: Expand branch network
 Develop more products and services
 Acquire a robust IT system Continually train staff – enhance professionalism Work with chiefs, headmen, Indunas Introduce village banks in rural areas – Savings mobilisation
MBT’s strategic insights
MBT has plans to: Expand branch network
 Develop more products and services
 Acquire a robust IT system Continually train staff – enhance professionalism Work with chiefs, headmen, Indunas Introduce village banks in rural areas – Savings mobilisation
Conclusion
 MBT is a viable organisation
 It has made a difference in improving people’s lives
 The nature of its operations require constant funding we work with

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Appendix 6: Day 4 -Visit to Micro Bankers Trust
Day 4 involved a visit to the Chongwe branch of Micro Bankers Trust (MBT), a microfinanceinstitution owned by the Government. Chongwe is a town approximately 60km to the East of Lusaka.
On arrival, participants were given a brief overview of MBT’s group lending policy in terms ofidentifying clients, training and the disbursement of loans. The first loans are given to self selectedgroups of five women. Each group is required topick a chairperson and secretary. The chairperson is
responsible for the group’s activities and liaisingwith the credit officer. Group members act asguarantors for one another and each group iseffectively treated as one client. The minimum loan
amount to the group is K3,000 and members decide
for themselves how much each one will take from
K3,000 borrowed.
The minimum amount of
K3,000, however, can be lowered, depending on thegroup’s capacity to repay. After the group has paid
off itsloan, the group can graduate and get a larger
loan. The maximum loan amount is K10,000. Thereafter, members qualify for individual loans.
Before the first loan is given, clients are required to undergo training. The training is done over 3
sessions and covers the terms and conditions of obtaining a loan from MBT, entrepreneurship, record
keeping and developing group bylaws according to MBT’s guidelines. After the training is completed,the members are tested to ensure that each member has assimilated what they have been taught. The
credit officer then visits the members’ businesses and homes and appraises each member’s businessand members’ assets. The group then fills in an application form, the application is evaluated andonce approved, sent to the chief executive officer (CEO) for final approval. The whole process takes
approximately 3 weeks but is also dependent on how long applicants take to provide necessary
information and documentation.
After the briefing at the branch office, participants
visited a vegetable farmer, Mrs Elizabeth Silonde.
She obtained her first loan of K400 in 2004 which
she used to purchase a pump. With her second loan
she then purchased pipes which she used to irrigate
her garden. She is now on her 5th cycle. She got aloan of K6,000 which she used to purchaseagricultural inputs. Because she now has irrigation,
she is not as dependent on the rains as she wasbefore. She says if it wasn’t for MBT she would
have not been able to accomplish all that she has
accomplished at date.
Participants then witnessed a group making a repayment at one of the members’ premises, Ms Grace
Kupa. Ms Kupa is also the chairperson. Members’ repayments are given to the Chairperson who thendeposits the repayment in MBT’s bank account and takes the deposit slip to MBT’s branch office for
MBT to record the repayment. The group can only make a deposit of the full repayment amount. Ms
Kupa owns a school and also rears chickens. With her loans, she has managed to build morestructures for her schools and grow her businesses. She has educated her children from the income
she has earned. The other members have shops and rear poultry.After witnessing how the repayment
is done, participants were then taken to the members’ businesses.

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The visit to Chongwe ended with lunch at another one of MBT’s client, Ms Christina Zulu, who owns
a restaurant. In addition to the restaurant, she owns 2 shops. She has been MBT’s client for 10 years.
The loans she has gotten from MBT have helped her grow her business and improve her quality of life.
Upon returning to Lusaka, the participants visited MBT’s head office where they met with the CEO,Mr Peter Mbewe, the chief financial officer and the chief operations officer. Mr Mbewe gave a briefpresentation, providing a history of the institution and highlighting the accomplishments andchallenges that the institution has faced. The main challenges being faced by MBT were the interest
rate cap and MBT’s low capital level which was affecting MBT’s ability to service its target clientele,
especially those in rural areas; as well as MBT’s legal form and ownership structure which was
having a negative effect on MBT’s ability to raise capital in the open market.
The day culminated in a visit to Bauleni
Project for Orphans, run by the Catholic
Church, where the Alliance Forum Foundation(AFF) has set up a pilot project to grow
Spirulina, an extremely nutritious microalgae.
AFF believes that Spirulina can help combat
malnutrition in Africa. Participants had theopportunity to observe the simplicity withwhich the algae is harvested and those who
were adventurous enough even tasted it!

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The Relationship MicrofinanceAppendix 7: Mobile Money Application, Regulation & Case study in Kenya
Date: December 6 2014
Presenter: George Mbira, General Manager, Rafiki Microfinance BankMOBILE MONEYAPPLICATION, REGULATION & C ASE

STUDY

1

IN KENYA

1.

Mobile Markets- Global & Kenya’s landscape2.

Kenya’s Microfinance Bank

3.

Institutional Background- Rafiki Microfinance Bank

4.

Mobile finance: Rafiki Microfinance Bank Case study

5.

E-Money Regulation & Supervision in Kenya

The Relationship Microfinance

Topics Highlights

1

144

The Relationship Microfinance

Mobile Markets - Global & Kenya’s landscape

1

Mobile Markets Situation
According to ITU (International Telecommunication Union ), by May 2014,
there were nearly 7 Billion mobile subscribers Worldwide which is about 95.5
percent of the world population.

• Sweden is a world-leading market in terms of mobile usage, mobile
penetration and mobile smartphone penetration. Sweden saw the
introduction of the world’s first 4G (fourth-generation) networks in 2009 andtoday the majority of Swedes are covered by a superfast 4G data network.
• Nigeria, Africa’s most populous nation – is the largest mobile market in Africa
and the tenth largest in the world. In 2013, Nigeria surpassed 100 million
active mobile subscriptions, which equates to around 65.8 percent of the
population joining the 100 million club.

The Relationship Microfinance• Germany is currently Europe’s largest mobile market and the eleventh
largest telecoms market in the world.

1

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Kenya’s Mobile Industry - Key Developments• Strong growth in number of subscribers has translated into sustained revenue
for the industry• Kenya is the world leader in mobile money being home to the world famous
M-PESA by the Kenya’s largest mobile operator Safaricom with over 17
million Kenyans using cell phones as a mobile wallets or bank accounts.
• In mid-2014, CAK (Communication Authority of Kenya) compelled Safaricom
to open M-Pesa platform to rival networks• New 4 MVNO(Mobile Virtual Network Operators) licences have been
awarded- Equity bank group, Tangaza Pesa, Nakumatt holdings etc

The Relationship Microfinance• 3G & 4G (LTE technology) mobile broadband services, successful mobile
payments & mobile banking platforms are delivering additional revenues

1

Kenya’s Mobile Services -Vision’s Rationale• Kenya Vision 2030- “Create a globally competitive and prosperous country
with a high quality of life by 2030”

2007- 2014- Success in financial inclusion since 2007 experienced, but 25% of
Kenya’s bankable population is still excluded from access to financial services.

The Relationship Microfinance• Vision 2030 Pillars- Economic, Social & Political

1

146

Mobile phone uptake

The Relationship Microfinancei. Subscription Growth on Mobile phones – Industry wide1

Mobile phone uptake

The Relationship MicrofinanceiI. Subscription Growth on Mobile phones – Safaricom

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Mobile Money Services

The Relationship Microfinancei. Subscriber growth on Mobile Money Services

1

Observations- Mobile Money Services Performance
Mpesa• Mpesa product pilot in 2007
• Massive growth in subscriber numbers between 2008 and 2009 due to growth in
the number of mpesa agencies as well as subscriber confidence in Mpesa as a
product.

• Sluggish growth of M-kesho product observed since its inception in 2010
• The poor performance attributed to non-optimal partnership (Safaricom andEquity Bank)/mistrust arising from disagreements on profit sharing over this productand launch of similar products with Safaricom’s competitors.

Mshwari• Product launched in 2012 and realizes phenomenon growth as a result of learnings
from M-kesho product as well as a steady and fully engaged working partnership
between Safaricom and Commercial Bank of Africa

The Relationship Microfinance

M-Kesho1

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The Relationship MicrofinanceM-pesa Story

1

The Relationship Microfinanceii. Volume of transactions on Mobile Money Services

1149M-PESA: Kenya’s Phenomena in Mobile Money Services

The Relationship Microfinancei. Subscribers Growth1

M-PESAThe Relationship Microfinanceii. Volume of Transactions Growth1150Impact Outcome of E-money Channels
Key Summary:• The facilitation of mobile phone based funds transfer payments system
beginning 2007, Has enhanced financial inclusion,• Contributed to financial services deepening and•

The Relationship Microfinance• Led to integration between traditional banking services platforms andemerging retail payment systems.
As at June 2014, the MFS had over 120,000 agents handling over 25.9 million
customers and approximately 74 million transactions valued at Ksh.89.9
billion (USD2.2 billion) monthly• Mobile phone money transactions were valued at an average of Ksh.6.3
billion per day (4.6% of annual GDP) in June 2014 compared with
Ksh.0.22billion (0.01% of GDP) in April 2007.
• The number of mobile phone money customers increased from 0.05 million in
April 2007 to 25.9 million by June 2014.

1

The Relationship Microfinance• 74million transactions valued at Ksh.189.9 billion (USD2.2billion) monthly.

Microfinance Banks - Kenya

1151

Microfinance Banks Regulation & Supervision-Kenya• The Microfinance Act, 2006 and the Microfinance (Deposit Taking
Institutions) Regulations 2008 issued thereunder sets out the legal,
regulatory and supervisory framework for the microfinance industry in
Kenya. The Microfinance Act became operational with effect from 2nd
May 2008.

The Relationship Microfinance• The principal object of the Microfinance Act is to regulate theestablishment, business and operations of microfinance institutions in
Kenya through licensing and supervision. The Act enables Deposit Taking
Microfinance Institutions (Now Microfinance banks ) licensed by theCentral Bank of Kenya to mobilise savings from the general public, thus
promoting competition, efficiency and access.
• With the Act’s 2013 Amendments, it is expected that the microfinanceindustry will play a pivotal role in deepening financial markets, enhancing
access to financial services and products by majority of the Kenyansespecially at the base of Pyramid.

1

Regulated MFI’s Industry Review in Kenya - Projections
Kenyan MFIs are projecting;•borrower levels to grow by 5.3% (23.0%annualized) in their individual portfolios and see the

The Relationship Microfinancecountry level growing by 10.4% (48.3% annualized) for the quarter ending September 2014.

Based on the market in formation as at June 2014, Rafiki’s market share has slightly increased to 8.1%.
Growth in Faulu market share is due to the aggressive growth in customer deposits and injection ofcapital by Old Mutual.

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1

The Relationship MicrofinanceInstitutional Background- Rafiki bankInstitutional Background•

Rafiki Microfinance bank launched its operations in the Kenyan market on 7thJuly 2011, with the operational scope cutting cross the urban, peri-urban andrural areas, with youth banking as our niche market.

Rafiki recently attained qualitative industry recognitions including the Best
Microfinance Institution in Kenya (CMA 2013, Citi Bank & Association of Microfinance Institution-Kenya) as well as the Overall winner in Best ProductInnovation (Kilimo Advance), 1st Runners up In Best Product Marketing(Chama Supreme Banking) and 2nd Runners Up in Best Microfinance Bank in
Kenya (East Africa Banking Awards 2014, Think Business).

The Relationship Microfinance

•

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Our Existence –why ? What? How?
•

Founding Rationale•

PurposeWe exist to foster positive change in youth entrepreneurship development throughstarting and scaling up youth entrepreneurs in achieving their social and economic
freedom. By so doing, we shall deepen socio-economic transformations amongst
individuals, families, communities and business enterprises for sustainable livelihoods,
employment creation and wealth generation while riding on a simple shared prosperity
and financial inclusion model.
•

Dynamic Products & services:•savings•
Loan facilities•
micro insurance•
Payments (MTS) and•
Entrepreneurship training

The Relationship Microfinance

The founding of Rafiki Microfinance Bank is to compliment Chase Bank in the promise of
Chasebank Group’s positioning as one-stop shop financial services provider in Kenya
and beyond. Vide Rafiki Microfinance Bank , serving the base of the pyramid
populations with modern, progressive and transformative financial services andproducts is made possible, specifically to the unbanked and the under banked –with
focus on the youth.

1

Strategy Positioning

Corporate

Chase Bank’s primary focus.

SME
RetailRafiki MFB - Market

Micro Finance

The Relationship Microfinance

HNI

1

Unbanked154

Our focus
Customer Segment

Delivery channel

Agribusiness

Retail Banking

Branches

Salaried

Business Banking

ATM's

Education

Investment Clubs
SACCOsAgency Banking

MSME

Trade finance andTreasury

Mobile Banking

YouthHousing and Mortgages

Women and Groups

10X Thinking Digital Platforms(Electronic &Mobile banking)155

Money Transfer Services

The Relationship Microfinance 1

Key Sectors

Rafiki Performance - Key KPIs
Customer Deposits

Client growth‘in millions
2,610
96,017
1,419

57,40027,863

486

7,498

DEC-12

DEC-13

SEP-14DEC-11

DEC-12

DEC-13

SEP-14

Customer deposits contribute largely to the funding of our loan book. There has
been a push within the organization to open and operate quality customer
accounts. We closed the month with 96,017 customer accounts which translated
to kes 2.6 bn deposit base recording a growth of 156%.

The Relationship MicrofinanceDEC-11

102

1

Customer loans and advances grew by 33%. September recorded Kes 2.9bn while
prior year we had 1.9bn. We managed to diversify our loan portfolio in 2014,
reducing our dependence on Business loans from 73% in 2011 to 34% in 2014.
Other business lines that improved include Housing from 3% to 17%, asset financefrom 9% to 26% and Agribusiness from 0% to 12%.

The Relationship MicrofinanceRafiki MFB- Key KPIs …

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156

Mobile Money – Customer to Business (C TO B)
Mobile Banking- Deployment Modes• Customer to Business (C TO B)
Definition : These are funds received by the bank from customers through mobilebanking.

a)
b)
c)
d)

Helps the bank to receive deposits
Loan repayment by Customers
Increases Reach and inclusion of our customers
Gives convenience

Purpose- For the Customer• Easy way of making savings• Reduced cost of banking• Convenient and available everywhere

The Relationship MicrofinancePurpose- For the Bank

Mobile Finance: Rafiki Case Study

157

The Relationship Microfinance2

The Relationship Microfinance

Mobile Money –Customer to Business (C TO B) performance1

Mobile Money –Business to Customer ( B to C)
Mobile Banking- Deployment Modes Business to Customer (B TO C)
These are funds moved from the bank through funds transfer, mobile moneytransfer and bill payment using our mobile banking platform (Elma).

The Relationship Microfinance• Customers can access the services through a USSD (*366#) or a mobile App (Elmaapplication download).

1

158

a. Account balanceb. Mini Statements
c. Internal Funds Transfers
d. Airtime Top Ups
e. Pay Utilities & Merchants
f. Business chatsg. Lifestyle features

Selling and Buying e-money

The Relationship MicrofinanceSelf-Service

E-Money Regulations & Supervision in Kenya

The Relationship Microfinance

1

1

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E-Money Regulations and supervision
Role of Central Bank of Kenya (CBK) in Financial Sector development- Industry Regulator & Supervisor• Policy: Enhancing policy profile through financial inclusion and market
developments/reforms – Microfinance Act 2006, 2013 Amendments/3rd party, agency
banking frameworks• Regulation & supervision – strengthening regulatory capacity andcapabilities to provide appropriate and adequate oversight;
i. Know the Market through KYC guidelines
ii. Agent of market development• Promoting competition and diversity.
This has been achieved through;a) Innovative delivery channels- Mobile Phone Financial Services (MFS),
Deposit Taking MFIs &Technology-led agency model among othersb) Appropriate Support Infrastructure – Financial Education, Deposit
Protection, Credit Reference Bureaus & consumer Protection

The Relationship Microfinance• Products –Encouraging different products that are cost effective, serve
different market segments & lowering barriers to entry

1

Sector’s Legal & Regulatory Reforms – Plus for the MFIs Space• The Amendment of the Microfinance Act in 2011 to allow MicrofinanceBanks to contract 3rd party agents - This allows microfinance banks to expand theirreach and depth cost effectively, while ensuring the stability and soundness of thefinancial system

microfinance banks to grow & develop. Includes allowing MFBs to participate in the
National Payment system that includes Kenya Electronic Payment & Settlement
system(KEPSS)designed to process large value and time critical payments on a real timebasis, and the Automated Clearing House (ACH).

• Allowance for Wider Products Offering Window including ability to offer money
remittances and foreign exchange transaction• MFBs requirement to maintain Cash Reserve Ratio (CRR) with CBK – CRR as ratiothat determines the amount of deposits that CBK requires licensed institutions to hold as
reserves. CBK uses CRR as a statutory instrument in regulating the appropriate stock ofmoney supply in the economy. /It’s a monetary policy instrument•

Compliance to Kenya Banks Reference Rate (KBRR) in pricing loans products- Promotes
responsible finance through transparency (disclosure) in pricing credit lending andenhancing the transmission of monetary policy signals vide lending rates.

160

The Relationship Microfinance• Operationalizing the Microfinance Act, 2006 and Regulation 2008 as well as
subsequent Amendments in 2013 – Providing enabling environment for1

Lessons & Recommendations
1.0 The Regulator to sustain;• Taking a lead in the development of the financial sector beyond the traditional
mandate of price & financial stability.
• Embracing innovation in a safe and sound manner• Embracing BETTER regulation rather than MORE regulation

3.0 Development of financial systems that enhance financial inclusion is vital – insystematic poverty reduction through savings mobilization and productive capital use
through credit.(Especially for the Base of Pyramid Populations)

4.0 Case for market driven interoperability is strong- The Proposed Kenya National Switch in providing a single switch for retail payments
sector including payment cards and mobile money transfers- Tapping into VAS (Value Addition Services) provided by Mobile Virtual Network
Operators platforms as this enhances competition, reduces costs and improves customer
experience/convenience.

The Relationship Microfinance

2.0 Collaboration remain key among sector players and the regulator for the subsector
positive evolution and progress

1

Q&A
GEORGE MBIRA
General Manager
Rafiki Microfinance Bank Ltd.

(+254) – 722 435 168

www.rafiki.co.ke

Rafiki Hse, Biashara Street,
P.O.Box 12755 – 00400
Nairobi, Kenya

161

The Relationship Microfinancegmbira@rafiki.co.ke

1Appendix 8: Closing remarks presented by Mr Kimanthi Mutua
In his closing remarks, Mr Mutua acknowledged the delegates active participation, diligence andcommitment to the input of the training proceedings content. He then went on to make some
proposals and pointers for the way forward. He is convinced that collectively [we] have the knowhow
to take microfinance to the next step. What [we] have failed to do is to bring together the synergies
and body of knowledge to make this happen.
Although [we] do have different challenges, different environments, that dictate the paths and pursuitsthat [we] take in the regulation and different policies, if [we] were to unveil all this, at the core ofwhat [we] are trying to achieve, there are more similarities (than there are differences) than [we] careto acknowledge. If [we] were to take a bird’s eye view, [we] would find that there a large number ofsimilarities in the challenges and solutions, but [we] tend to get lost in [our] differences and uniquesituations.
He went on to state that in his opinion, this was more of a workshop than training with an exchange ofideas, knowledge and experiences that contributed significantly to the input that was made. He went
on to state that this workshop can be used as a platform to give birth to new ideas for a new direction
in microfinance and made the following suggestions.
Suggestion 1 - The way forward is for [each one of us] to apply what [we] have learned in [our]sphere of influence and to play a major role in [our] sphere of influence. It would be good if theorganisers would create a forum for mutual accountability, to follow up on the value that eachdelegate has added and the organisations to track this going forward. [We] should stop looking atthese workshops as events, but as processes and put in place systems capable of monitoring andreviewing actions. This, he felt, was very important.
Suggestion 2 – Secondly, and more importantly, he suggested that there was an opportunity arisingfrom this event for the beginning of a new era that tries to influence change in the direction of
microfinance in Africa. But to influence the direction [we] need to have drivers or driving forces andhe sees these driving forces coming in at 4 levels.
Level 1 – Which he believes is the most important and referred to as “the big ticket item change”, isthat change that can be done at higher levels of government, higher levels of [our] structures, such as
government ministries, in rethinking some of the main policies that shape, not only the institutions
and the regulations, but also the direction of the microfinance movement. The ideas need to be wellarticulated. [We] have touched upon them in the broader sense and [we] have been given and haveborrowed with much enthusiasm the concept of public capitalism which encompasses a lot more thanjust the title.
Level 2 – The change in the level of regulatory and supervisory knowhow. [We] have seen that thiscan occur very easily through exchanges such as this. There are many exchanges that take place inthe world driven by different bodies of interest. The direction of global initiatives has been awayfrom microfinance into the broader concept of financial inclusion of which microfinance is only asmall component and so we forget certain important issues about microfinance. The principles therein(in the broader aspects of financial inclusion) are of wide global application and so there is an
opportunity to look at an “africacentric” niche and also a focus on microfinance. That’s where he seesa special niche for [us].
Level 3 – Lies in capacity building through knowledge development and skills improvement
interventions as well as training. It is very good that one of the main organisers is in the business of
doing this. He believes this event provides the content outline for the curriculum and also a very rich
agenda that can be pursued and provide the knowledge, skills for capacity building issues likeresearch, etc, which have all been talked about that is going to help [us].

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Level 4 – Which he referred to as “the low hanging fruits” are the microfinance networks. He
indicated that he was very impressed with a couple of the networks represented at the training that hadvery good initiatives and were playing a significant role in influencing and shaping the future of
microfinance in their countries. For him, these are the low hanging fruits that [we] need to take into
account very quickly.
But why this change of direction? Mr Mutua indicated that this change of direction was required
because the quest for the regulation of microfinance and the evolving new paradigm of financial
inclusion (even as it emphasises consumer protection and consumer education), has not consideredadequately the consequences of change in the institutional form of MFIs. He believes this is the only
thing [we] really need to focus on.
He thinks this discussion will resonate very well with political leadership and therefore its chances ofbeing bought into are that much higher. [We] must recognise though that there is going to be a lot of
hurdles and limitations in effecting this change and those hurdles and limitations will come mostly
from the global financial inclusion initiatives which greatly influence direction, the existing literatureand publications on microfinance which informs all of us and most of the international training andworkshops which are the major sources of capacity building. So unless [we] recognise this, then it
will be very difficult to build a strategy that will achieve the changes [we] want to achieve.
He thinks COMESA and AfDB are the best placed to engage these spheres of influence. And it has tobegin with them embracing change and also broadening the discussion beyond this forum because thenumber of people that will have to be convinced is much bigger than this. Mr Mutua thinks thebiggest thing that COMESA and AfDB could start with is by playing the advocacy role of making thechange possible.
At the technical level, the COMESA Monetary Institute with the support of the AfDB can play a very
big role in capacity building, technical training, promoting the fundamentals of microfinance throughtraining and other means and the development and dissemination of knowledge. The output of thisworkshop provides a very important and good point at which to begin.
Lastly it is for all of [us] to keep [our] focus on what and why microfinance or financial services is as
important as it is as a poverty eradication intervention that uses access to finance as a means and not
an end in itself. Sometimes this gets flipped. Someone mentioned that [we] must also avoid trapping
poor people in “the game of money” (i.e. the debt trap). And this was a very important point. How
do we make sure that we are not trapping people in this game of money?
He believes that adding the developmental role in regulation will help [us] to do this because [we]sometimes tend to focus too much on the regulatory role as opposed to the developmental role. Yes[we] need very strong institutions that serve people, we need innovative products and services toachieve this, but in the end [we] must make sure [we] retain the creative tension between social andfinancial goals.

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Appendix 9: “Inclusive Growth and Job Creation” Africa MSME Program”
Date: December 9, 2014
Presenter: Dash S, African Development Bank

‘Inclusive Growth and
Job Creation’
Africa MSME Program

SMEs access to finance in Africa•••

SMEs are the backbone of the African private sector: 58%
contribution to total employment and 33% contribution toGDP.
Access to finance (availability and cost) is a key issue to
SME development in Africa: the SME Funding Gap isestimated at over USD 170 billion.
Funding gap largest in LICs and Fragile States

1

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164

(M)SMEs access to finance in Africa:
the challenges•

Supply-side constraints– Local tier 2 FIs are the key institution serving SMEs but
they have constraints:• Liquidity constraints (i.e. lack of medium to long-term funds)
and provide only short-term financing to SMEs
• Capacity & skills constraints (SME loan appraisal &monitoring) and compensate this with high pricing and highcollateral•

Demand-side constraint– Limited capacity to submit professional applications– Poor capitalization which translates into low capacity togive collateral
1

Providing liquidity and TA:
Africa SME Program
Objectives•Develop an innovative mechanism to increase support to local
Tier II / Tier III FIs and reach out to SMEs in RMCs:–Offer medium / long term funding to local FIs to increase loan
volumes and maturity to SMEs
–Capacity building to both FIs and SMEs to increase lending to
SMEs and improve pricing

Program Design•USD 125 million over 4 years•Standardized multi-currency LOCs (4-7 years) to about 25 FIs•Coverage of all 5 African regions•Focus also on LICs & Fragile States•TA component: Capacity building of FIs where needed toenhance SME products, loan quality and loan portfolio size
1

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165

Targeted FIs & Selection
Criteria
Targeted FIs:
•Small / medium sized local banks dedicated to local SMEs
•National DFIs with SME focus•NBFIs (leasing, factoring, SME mortgages, MFIs with SME
loan book)
FI Selection Criteria:•Good governance, commercial viability, compliance toregulatory requirements etc (as for regular transactions)•Relevant Bank’s policies and safeguards requirements apply(e.g. environment and social management system)
Transaction size:• Debt: 1 - 9 Mil. USD or in local currency• TA: situation specific1

Africa SME Program TA• FAPA trust fund support for all participating FIs• Minority co-payments by FI to ensure‘commitment’. Capacity building in SME loan
appraisal and monitoring, introducing SME
products, SME desk, or general FI strengthening• Also possible TA for strengthening SMEs forbusiness plan submissions• Efficiency through pre-procurement; Frankfurt
School of Management and Finance and others• Dedicated SME & TA desk to monitor program
capacity building progress
1

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Implementation• Currently transactions (LoCs and TA approved for7 FIs including in Mozambique, Burkina,
Cameroon, Nigeria, Benin, Tanzania;• 5 partner FIs under processing, others in pipeline• TA providers recruited and making assessments;• Website and FI platform to be launched shortly

1

Challenges• Lack of regulation and supervision• Absence of Credit Bureau• Operational Inefficiency (IT,
Accounting, Governance,
reporting)• Central collateral registration• Weak Judiciary• High NPLs
• Profit making MFIs (high margin)

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Conclusion•

Concerted AfDB efforts to launch SME access tofinance program• Processing efficiencies make program attractive
proposition for FIs•

Program will contribute to addressing financing gap
for MSMEs in Africa and promote inclusive growth•

Program supports building stronger local FIs /financial market/ Financial Inclusion

And last but not least:• Feel free to indicate to us FIs that you believe
meet criteria and would be interested:– R.Zegers@afdb.org– S.Dash@afdb.org

K.Numasawa@afdb.org
1168168