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Thursday, September 1, 2005

African Microfinance Fails to Profit

By Rob Katz

An April 2005 report on the financial performance of Africanmicrofinance institutions (MFIs) finds that more than half of those surveyedfail to turn a profit. Conventionalwisdom (and much of the writing on this site) tends to say otherwise–that microfinanceis profitable. Maybe that’s a big reasonwhy this report, jointly published by the DC-based Consultative Group to Assist thePoor (CGAP) and the Microfinance Information Exchange, is so important.

Most African MFIs are not out just for profit–often, theirprimary mission is to serve poor, at-risk groups and profit if possible. That explains why cooperatives generally failto profit, while regulated microfinance providers–which behave more likebanks–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 costsas barriers to MFI profitability.What the report doesn?t say is that the private sector willlikely resolve these discrepancies, given time and decent governance. Hard-to-serve, unprofitable groups willcontinue to be the focus of cooperatives and NGOs, while banks will incorporatetechnology and management practices focused on a slightly better-off (but stillpoor by all accounts) clientele. Thetechnology is, in many cases, already here–read about the Remote TransactionSystem’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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