Financial Sector Development in Africa: Opportunities ... - World Bank

Microfinance in Africa 15
Impediments to the Microfinance Industry
and Best Practice Solutions
If MFIs in Africa are to expand their outreach—without a significant
increase in external funding—they need to become more efficient and
productive by decreasing the cost of due diligence.
Cost Constraints and the Application of Technology
In general, lending out $1 million in $100 increments will require higher
staff costs than lending out the sum to only one person because of the due
diligence involved. One way to decrease costs is to lend the sum to fewer
customers—to go upmarket. To remain serving the same market segment
or go even further downmarket, MFIs need to find other ways to jump
the cost barrier: m-banking and biometric technology can be the game
changers necessary. Another beneficial effect of m-banking especially is
that it can also assist MFIs reach into rural areas by helping overcome
infrastructure deficiencies and thus the costs involved in physically reaching
out. Every MFI will have to conduct a cost-benefit analysis to understand
the viability of technology application with respect to its scale,
methodology, and the state of regulation in its country of operation.
Cost savings needed to expand MFIs’ outreach. To extend their outreach,
MFIs need to improve their performance. In 2010, MFIs in Africa
performed the worst in a cross-regional comparison, with a return on
assets of 1.02 percent, while the return on assets performance in the
Middle East was strongest, at 3.99 percent. Although operating at lower
levels, a closer look at the overall performance of MFIs in Africa over
time shows that median returns on assets have slumped only in 2009 in
comparison with the returns of previous years, and have already
increased in 2010 (figure 1.7).
The comparatively lower return on asset performance by MFIs in
Africa coincides with their cost structure (figures 1.8a,b and 1.9a,b).
While financial costs are kept low because of successful deposit mobilization,
5 high overall expenses stem from operating costs (MIX and CGAP
2009). Overall, the cost per borrower for MFIs in Africa has increased
steadily over the last several years. Although this could be seen as a sign
of decreasing efficiency in nominal terms, it might also be the result of
MFI’s double-bottom line that includes reaching out to poorer clients.
Somewhat surprisingly, the cost per borrower ratio has been only a
third that of the ratios of East Asia and the Pacific and South Asia.