Two-thirds of the population in sub-Saharan Africa remain unbanked. World Bank Global Findex data for 2014 places the number of adults with an account at a bank or other financial institution at 34%. Yet, more than half of those surveyed in 35 countries had borrowed money (from a variety of sources) in the last year. These numbers are skewed by the inclusion of SA data, with adults who have some form of bank account at 70%, and those who had borrowed money at 87%.

Data hub MIX Market reports that there are 4.7 million active borrowers from (specifically) microfinance institutions on the continent, with a gross loan portfolio of $7.1 billion (this is based on data submitted to MIX Market). Nearly half of this figure is made up of borrowing in Kenya and Tanzania alone.

Global advisory group EY says: ‘What once started off as microcredit – a simple service offering microloans to the world’s unbanked populations – has evolved into complex microfinance markets operated by thousands of microfinance institutions. This evolution is often called the financial inclusion agenda.’ The two are inextricably linked.

We tend to focus on the actual providers of credit, such as banks, but a 2013 UN report titled Microfinance in Africa makes the point that microfinance is developing at three different levels of the financial system: micro (financial service providers), meso (support service providers) and macro (policy and regulatory level). In divergent markets, these levels are maturing at disparate rates.

The UN argues that while ‘microfinance is proving vital to empowering communities’, it is not ‘on its own a miracle solution to eradicate extreme poverty’. It cites the experience of Southeast Asia as one that demonstrates how microfinance can ‘deliver positive effects only when it is combined holistically and inte-grated effectively with other economic and social programmes’. And it’s not just confined to lending to individuals. The UN report also states that ‘only 15% of SMEs in Africa have access to microfinance’.

Crucially, the UN says that at the broader industry level, ‘key elements are necessary to form an integrated framework, including adequate regulatory frameworks, legislation that protects consumers, and improvements in transparency and accountability of the public sector’.

In many African countries, regulatory frameworks and legislation remain unsophisticated as financial systems stay relatively underdeveloped. Fortunately, says the UN, ‘African governments are taking note of the importance of financial inclusion. 81% of African countries have a strategy document for developing the financial industry and 56% have a designated unit within the regulatory agency’.

Patrick Honohan and Thorsten Beck, in a 2007 World Bank report called Making Finance Work for Africa, cite the following features of the financial sector in Africa: its small size, the shallowness of the industry, the high exposure to economic and sociopolitical shocks, the high incidence of informality, governance and regulatory deficiencies, intermediation deficiencies, and the dominance of the banking sector.

Broadly speaking, there are six types of microfinance providers: informal ones, credit unions, banks, deposit-taking microfinance institutions, NGO microfinance institutions and consumer lenders. The last of these would be familiar to most as commercial, non-bank lenders found in cities. More recently, payday-loan providers have become prevalent in this segment of the market.

There is an enormous amount of credit unions in Africa. In 2014, the World Council of Credit Unions, estimated that there are more than 20 000 credit unions, with nearly 19 million members in 25 African countries. This is slightly lower than Asia (excluding China), the continent with the most credit unions globally (more than 24 000). While the core product of these unions in some markets is often savings, credit is also provided. In SA, we know these savings and credit co-operatives as stokvels.

Given the very limited amount of secured (especially mortgage) lending by banks on the continent (outside of SA), and still limited penetration of credit cards, unsecured lending by these institutions tends to dominate loan advances.

While the picture in the upper income segment of the SA economy looks different, the situation in the rest of the economy mirrors that of other African countries. In 2013, then CEO of Capitec Bank, Riaan Stassen told Moneyweb that the bank believes ‘unsecured lending will form a very important part of credit in the future – it has to’, adding that a significant percentage of unsecured credit will be used for building new houses as well as for home improvements.

However, broadly speaking, granting credit remains difficult. The accuracy and availability of information from formal credit infrastructures such as credit bureaux differs markedly from country to country.

One breakthrough that holds significant promise is a tie-up between traditional (commercial) banks looking to provide credit and mobile money transfer services. Kenya Commercial Bank (KCB) has signed up more than 2.1 million customers since launching a joint account with M-Pesa. KCB uses airtime, billing and transaction behaviour to predict an M-Pesa customer’s creditworthiness.

Across its base, KCB has granted KSh2.1 billion (nearly R300 million) in loans to 800 000 account holders as at the end of June 2015. Nearly four in every five loans is for three months and under, with a current term limit of six months on credit.

Typical loan sizes fall within the broad KSh2 500 to KSh50 000 bracket (around R350 to R7 000), which accounts for 82% of the base.

So far, the uptake has surprised even the most bullish of analysts. You can be sure that banks and financial services providers on the continent and in other emerging markets are studying KCB’s experience closely, with a view to replicating it.

‘Africa stands out for the strong usage of mobile money and, increasingly, branchless banking’

CAROLA HUG, RESEARCH ANALYST, RESPONSABILITY

Swiss-based development investment house ResponsAbility Investments AG, in an article titled the Microfinance Revolution in East Africa, contends that ‘East Africa has become a hotbed of innovation in financial services. Kenya is fast catching up with South Africa to become the country with the most comprehensive provision of financial services on the continent’.

Carola Hug, research analyst at ResponsAbility says: ‘Whereas South Africa has relatively strong players in corporate banking or consumer lending, the classical microfinance model is not that present. East Africa on the other hand – and especially Kenya – has relatively prominent microfinance markets and a strong weight on mobile money – prominent across sub-Saharan Africa, but rarely as widely spread as in Kenya.’

Aside from this not-insignificant growth in the Kenyan context, the broader microfinance market continues to grow steadily. A report by ResponsAbility puts growth for the global microfinance market at between 10% and 15% for 2016.

There is still significant potential, and Respons-Ability cites the World Bank’s World Development Indicators, which show the ‘ratio of private credit to GDP in countries with large microfinance markets hovers around 40%’, while in developed nations ‘this indicator lies well above 100%’. The report also states that ‘even though the rate of financial inclusion has progressed rapidly in recent years, there is still a large gap between developing and developed countries’.

The microfinance market in sub-Saharan Africa is expected to grow at 15% to 20% this year. Hug says what makes sub-Saharan Africa unique ‘is that generally, there is still low penetration [of financial services] in many markets. At the same time, Africa stands out for the strong usage of mobile money and, increasingly, branchless banking’.

According to ResponsAbility: ‘Markets of net commodity exporters like Ghana and Nigeria, will, however, experience slower growth as a partial consequence of decreasing exports and subsequent currency volatility.’ Hug adds that there will also be ‘the need to focus on portfolio quality’. On the other hand, says ResponsAbility, ‘net commodity importers like Kenya and Tanzania will be less affected by global headwinds and their microfinance markets will expand robustly’.

In SA particularly, analysts and investors have been keenly awaiting Capitec’s move into other countries on the continent. In theory, this looks obvious on paper and, in practice, this would emulate the moves by most local financial institutions over the last 20 years.

Capitec, in fact, is somewhat of an outlier, given that the four big retail banks and all the large insurers have expanded operations to the rest of the SADC region and beyond. Barclays Africa and Standard Bank are among the largest retail banks on the continent, and an alliance between Nedbank and Ecobank has resulted in a significant footprint across Southern, East and West Africa.

Smaller competitors such as Blue Financial Services and Real People have been active in other markets on the continent. The latter provides finance to businesses in East Africa, with branches in Kenya, Tanzania and Uganda. On a net advances basis, Real People’s East African operations comprise just less than 20% of its loan book.

Old Mutual, through its 2013 purchase of a controlling stake in Faulu, became one of the microfinance market leaders in Kenya. At the time of the transaction, Faulu was the second-largest microfinance provider in the region, with in excess of 100 branches and more than 400 000 customers. The attraction for Old Mutual was not the microfinance business in itself but rather the strong distribution network through which it could offer similar products to those it sells to in its SA Mass Foundation Cluster.

In 2013, Capitec confirmed it had ambitions outside of its home market. At the time, chief financial officer Andre du Plessis told Bloomberg the bank was interested in growth outside Africa with a banking partner, though there were no immediate plans. Among the long-term goals listed in that financial year’s annual report was ‘internationalisation’.

Curiously, the bank said that it would achieve this by ‘replicating Capitec Bank’s low-cost banking model on other continents, in countries with similar profiles to South Africa’. Given that was a stated aspiration within ‘the next five years’ (in other words, by 2018), perhaps we will see a move – tentative or otherwise – northwards. Then again, an aspiration for ‘internationalisation’ has not appeared in any annual report since.

By Hilton Tarrant
Image: Andreas Eiselen/HSMimages