/ 25 June 2010

Microfinance on shaky ground

Despite its improving business environment and attractive untapped markets, Africa is still a risky place to do business.

Despite its improving business environment and attractive untapped markets, Africa is still a risky place to do business.

The African microfinance industry is showing signs of positive growth, but this has not happened without collateral damage. The majority of Africans do not have access to the traditional financial systems either because of a lack of facilities or their loan requirements are considered too small to be profitable for the larger, formal financial institutions.

It seems that Africa is still struggling to bring its people into the financial fold as quickly as its governments would like, and this is affecting the business of those offering microfinance as well. Pan-African microfinancer Blue Financial Services has first-hand knowledge of the African markets and their risk.

The company operates in 13 African countries and expanded rapidly before the global financial crisis. It recently announced a loss of R1.03-billion for the year ending February 2010. Chief executive Dave van Niekerk highlighted a number of reasons for the loss, including rising costs and volatile African currencies.

‘Blue Financial Services is currently considering a recapitalisation of its operations in order to ensure the sustainability of its business. As part of this strategy, all expansions have been halted and certain business segments and product lines are being restructured, rationalised or disposed of,” says Morné Reinders, group corporate affairs executive.

Reinders says significant time and resources are spent researching and understanding the requirements to register a company and acquire the required licensing before moving into an African country. Blue has attempted to limit its exposure to risk by operating using deduction codes negotiated with governments or private payroll companies ahead of a loan being issued.

The company still holds that formal financial service providers are too slow in spreading their offerings into the farther reaches of the African economy, often missing out on servicing customers who predominantly rely on microfinance, local savings products and community banking.

Another operation that started off with the laudable ideal of bringing short-term insurance to the low-income, unbanked market was Metropolitan’s Cover2go. Cover2go offered a number of delivery channels, including mobile purchases of products similar to the ones now being offered by M-Kesho in Kenya.

It also allowed agents in spaza shops to take payments using the prepaid systems already in use for utilities. The initiative was met with positive reports and featured strongly in Metropolitan’s latest sustainability report. However, Cover2go has quietly disappeared and on further investigation it has been learned that the company is in the process of being shut down.

‘The decision to close Cover2go was a business decision taken after due consideration of the profitability and efficacy of the distribution model. Metropolitan has a unique customer footprint and, as we continue to search for the most effective distribution models that offer the best value to our clients, the closure of Cover2go will not in any way negate the level of service to existing Cover2go policyholders,” says Rob Duggan, the executive general manager of Metropolitan Retail’s wholesale business division.

The figures of Blue Financial Services would make most companies think twice before investing in it. But that has not stopped investment group Mayibuye Holdings from announcing that it would recapitalise Blue with R163 -million, as well as a R300- million loan facility. Whether this will be enough to turn the company around remains to be seen.

But it seems that the lure of African expansion still outweighs the very obvious risk. Perhaps the old African proverb — smooth seas do not make skilful sailors — best sums up the operational realities for microfinance in Africa.