Jean-Michel Sévérino, 55, Inspector-General of Finances, is former World Bank Vice President for Asia, was Chief Executive Officer of Agence Française de développement (AFD) from 2001 to 2010, created this blog. He now manages Investisseurs et Partenaires (I&P Conseil). This fund management company, based in the Madeleine quarter in Paris, was launched in 2001 to focus exclusively on Sub-Saharan African SMEs, by seeking a social or environmental impact. Jean-Michel Sévérino therefore takes a keen interest in the development of microfinance, one of the topics to be addressed on 19 and 20 September during the Convergences 2015 Forum in Paris. He is expecting this forum “to implement the call for responsible microfinance”. The call from Paris, launched in 2011, will be extended to a global call this year in which stakeholders from several continents will participate.
Microfinance for the MDGs
Another major challenge: the initiatives to be launched to follow up on the Millennium Development Goals (MDGs) after their 2015 deadline. In this regard, Jean-Michel Sévérino believes that microfinance continues to be a “wonderful tool that allows highly disadvantaged communities to implement projects which raise their standard of living”.
It directly contributes to the first MDG, which concerns employment and income. Microfinance also indirectly participates in the cross-cutting MDGs, for example by facilitating access to water or health care. “Microfinance as a savings product continues to provide financial services to communities, even when it does not seek to support a specific economic project”, points out AFD’s former CEO.
The issue of “localized microfinance crises”, which occurred between 2008 and 2010 in India, Morocco and Nicaragua, was already addressed during the last edition of the Convergences 2015 Forum. These phenomena, which are also at work in the classic financial sector, have taken different forms: imprudent management in India, over-indebtedness of clients in Nicaragua and default on payment in Morocco.
These crises have underlined the fact that the microfinance industry has developed in an unregulated context with a whole host of more or less professional institutions. They have shown the need to establish national or sub-regional regulatory systems, as is already the case in West Africa where prudential rules exist.
“For an investor, the first obstacle in microfinance remains the quality of the institution itself”, points out Jean-Michel Sévérino. “Teams are sometimes launched with a lot of enthusiasm, but with little professionalism. Others come about through development projects and are managed in a very administrative way. In other cases, the market does not allow break-even to be achieved, as the area covered is too sparsely populated for example.”
For I&P, microfinance continues to offer huge development potential, because Africa is still marginal in the global microfinance networks: it only accounts for 7% of the funds raised, with EUR 3.6bn, and 5% of borrowers in 2010 according to Mix Market data. The reason for this? “Microfinance was first developed in Asia and Latin America in highly populated urban or rural areas”, answers Jean-Michel Sévérino. As this form of financing has fixed costs, business volumes must be high in order to reach break-even prior to profitability. Yet African cities continue to be smaller than the major cities in Latin America or Asia and rural areas are not as densely populated. “Demographic development in Africa does, however, point to the likelihood of a catching-up process over the next twenty to thirty years”, says Jean-Michel Sévérino. There will be huge needs in cities, but in his opinion, microfinance in rural areas continues to be of utmost importance. This involves establishing new professional practices and providing a response to economic challenges that have a direct impact on development. I&P has already made two investments in this area, one in Namibia and the other in the Senegal River Valley.
Last May, I&P launched a new EUR 40m investment fund, I&P Afrique Entrepreneurs (IPAE), for private operators seeking between EUR 300,000 and EUR 1.5m of equity. In other words, loans which are too small to interest banks. This fund will complete a financial company, IPDEV, which has invested under I&P in some thirty African SMEs, including a dozen or so microfinance institutions.
Acep Cameroon, an example of success
The Agency for Private Enterprise Credit (Acep Cameroon) is one of the success stories in its portfolio. This start-up was initially a public credit initiative launched in 2009 for micro-enterprises located in urban areas and operating in the informal sector. Its targets: traders, tailors, carpenters and other craftsmen who are unable to provide banks with a guarantee for a classic loan. Acep was initially financed by Agence française de développement (AFD) and the European Union (EU) and became a limited company in 2005. This institution has become a leader in the sub-regional credit market with CFA 1bn of financing a month and lines open to all entrepreneurs, provided their activities are viable and that they are of “good moral character”. Acep Cameroon, which is part of a network also operating in Senegal and Madagascar, thus stands on its own two feet, with support from its shareholders. These include I&P, but also the International Bank of Cameroon for Savings and Credit (Bicec, subsidiary of Banque Populaire).
Banks remain reluctant
In Africa, the launch of a microfinance institution (MFI) often requires grants, provided by donors like AFD, due to the major initial staff training components that these projects involve. Some examples do, however, prove the opposite. The company Afrique Emergence et Investissements (AEI) in Côte d’Ivoire has, for example, developed over the past four years without grants. Banks operating in Africa still show very little interest in microfinance due to their high operating costs. However, like Bicep, they can invest in microfinance networks alongside other operators. Mobile banking constitutes a new frontier for African microfinance. It has been developed in Kenya for example and allows financial transactions to be made by mobile phone. “This solution will not replace direct contacts and networks”, points out Jean-Michel Sévérino. “Physical contact and a relationship of trust in financial services are important for African clients. The full dematerialization of the relationship remains quite implausible”. An address book and the relationship of trust are exactly what this development expert has brought to his new position.