African Microfinance Fails to Profit

Rob Katz — Thu, 01 Sep 2005 17:01:31 -0400

An April 2005 report on the financial performance of African microfinance institutions (MFIs) finds that more than half of those surveyed fail to turn a profit. Conventional wisdom (and much of the writing on this site) tends to say otherwise – that microfinance is profitable. Maybe that’s a big reason why this report, jointly published by the DC-based Consultative Group to Assist the Poor (CGAP) and the Microfinance Information Exchange, is so important.

Most African MFIs are not out just for profit – often, their primary mission is to serve poor, at-risk groups and profit if possible. That explains why cooperatives generally fail to profit, while regulated microfinance providers – which behave more like banks – average a 2.6 percent annual return on assets. The report identifies poor infrastructure, hard-to-serve rural markets with low population density, and high labor costs as barriers to MFI profitability.

What the report doesn’t say is that the private sector will likely resolve these discrepancies, given time and decent governance. Hard-to-serve, unprofitable groups will continue to be the focus of cooperatives and NGOs, while banks will incorporate technology and management practices focused on a slightly better-off (but still poor by all accounts) clientele. The technology is, in many cases, already here – read about the Remote Transaction System’s successful pilot in Uganda, for instance – and the management practices are coming. Is microfinance dead in the water in Africa – hardly. What do you think?

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African Microfinance Fails to Profit