African Microlenders' Loans 'Too Small to Bring in Profit'

2005 August 31
© 2005 Business Day. All Rights Reserved.

African Microlenders' Loans 'Too Small to Bring in Profit'
Rob Rose, Chief Reporter
Johannesburg

AFRICAN microfinance institutions face an uphill battle to become profitable, says the first study on how they lend to the poor.

A report on the study of 163 microfinance institutions was released yesterday by the Washington-based Consultative Group to Assist the Poor (CGAP). The report shows an emerging financial sector battling to profit amid high expenses.

African microfinance houses show return on their assets of 1,6%, the lowest in the world. By contrast, those in South America report returns of up to 5%, while those in eastern Europe show returns of more than 7,6%.

The report says one of the main reasons for the low returns is that African countries lend relatively small amounts -- $307 on average -- that do not cover costs generally higher than in many regions in the world.

CGAP microfinance specialist Jennifer Isern said that changing the picture would be key for African institutions in the next few years.

"The challenge is to increase client numbers and rethink the expense side (of their business)," Isern said.

But there does not appear to be much room to cut costs. "Better communication, improved lending products, new technology or some combination (will help)," she said.

Isern said other measures to cut costs could entail finding "innovative ways to deliver service" -- such as via retailers -- while building links with banks and other institutions.

The research showed fewer Africans were likely to default on repayments than elsewhere.