The Partnership for Financial Inclusion Greenfield Microfinance in Sub-Saharan Africa A business model for advancing access to finance Sub-Saharan Africa has the lowest level of access to finance of any region in the world with an average banked population of only 24 percent. The lack of reliable and affordable financial services is a constraint on the lives of many low-income individuals as well as the expansion of the small-scale business sector and economic growth. The region’s banking systems are small in both absolute and relative size, and the microfinance sector has been relatively slow to expand on the continent compared to other regions in the world. There is a range of strategies for extending the reach of microfinance, including the transformation of existing institutions, the creation of stand-alone greenfield microfinance institutions (MFIs) without a centralized management or holding structure, bank downscaling and others. Identifying sustainable and efficient ways of advancing microfinance is critical to unlocking the full growth potential of Sub-Saharan African (SSA) and to make sure future economic growth is inclusive. Greenfield MFIs in Sub-Saharan Africa: A Business Model for Advancing Access to Finance examines the role the greenfield MFI business model plays in increasing access to finance in the African context. A good number of greenfield MFIs on the continent now have sufficient track record to enable an analysis of their performance and role in the market. A stocktaking of the experience can help inform decisions that will shape the coming generation of investment in microfinance. This issue of Field Notes from the Partnership for Financial Inclusion summarizes the main premises, findings and conclusions of the research paper. The paper, published by the Consultative Group to Assist the Poor, CGAP, was authored by Julie Earne and Tor Jansson from IFC, Antonique Koning from CGAP, and Mark Flaming, independent consultant. 1. Introduction Holding Company, MicroCred SA, Opportunity The study examines the performance of subsidiary Transformation Investment, ProCredit Holding AG & greenfield MFIs, the holding company model and the Co, and Swiss Microfinance Holding. contribution of greenfield MFIs to market development. The landscape The greenfield business model generally focuses In SSA, the greenfield model made its debut in 2000 FIELD NOTES on expanding financial services through two main when ProCredit Holding opened a bank in Mozambique. elements: 1) the creation of a group of “greenfield For a few years, ProCredit was essentially alone in MFIs” defined as institutions that are newly created pursuing this strategy; it opened up in Ghana in 2002, without pre-existing infrastructure, staff, clients or in Angola in 2004 and in the Democratic Republic of portfolios, and 2) the central organizing bodies – often Congo (DRC) in 2005. holding companies – that create these MFIs through common ownership and management. Between 2005 and 2006, Advans, Access, and MicroCred holding companies were formed with a The holding company usually also plays a strong role structure similar to that of ProCredit and by the end of in backstopping operations, providing standard policies 2007 had collectively launched five greenfield MFIs in and procedures and co-branding the subsidiaries in SSA. Accion started its first greenfield MFI in the same the network. Given these commonalities, this model period in partnership with three commercial banks in can also be considered a type of franchise where the Nigeria. As a result of this initial experience, Ecobank sponsors inject a tested approach and sufficient patient and Accion entered into a partnership and opened capital to move new institutions past the difficult start- two greenfield MFIs in Ghana and Cameroon. From up phase and onto a growth trajectory in some of the that point on, the Access, Advans, and MicroCred most challenging markets. networks each created more or less one new MFI per year. Toward the end of the decade, ASA and BRAC Detailed performance data were obtained from 10 from Bangladesh created new organizational structures holding companies on 30 greenfield MFIs in SSA and that also allowed them to begin establishing greenfield interviews were conducted with more than a third of MFIs in Africa. Over the six years from late 2006 to end the CEOs of these banks. This cohort represents 90 of 2012, a total of 27 additional greenfield MFIs were percent of all greenfield MFIs created in Africa between launched. 2000 and 2012. They belong to the following holding companies: Access Microfinance Holding, Advans SA Meanwhile, FINCA and Opportunity International have SICAR, ASA International Holding, BRAC International used the holding company structure to upgrade their Holdings, EcoBank International, FINCA Microfinance existing (largely NGO) affiliates to regulated deposit taking institutions, and then integrate them in a common loan quality and better profitability than MFIs with no strong investment company. Like the other networks, the holding holding/network affiliation. The average greenfield MFI tends to company has been a vehicle for mobilizing investment capital, be much better capitalized and to have more formal structures expanding and backstopping operations, and establishing and deposit taking infrastructure than the average young MFI an ownership model for an international network of financial reporting to MIX. institutions. Some key findings When the expansion of greenfield MFIs took off in earnest at Balance sheet indicators the end of 2006, the first seven (Procredit Angola, ProCredit • Taking into account both the initial equity capitalization and DRC, Procredit Mozambique, Procredit Ghana, Finca DRC, the technical assistance funding, the average initial funding Opportunity Ghana, MicroCred Madagascar) had 107,887 loan package required for a greenfield MFI ranges from $6-$8 million accounts with an aggregate loan portfolio of $57.4 million and over the first 3-4 years of operations. Thereafter most MFIs held 220,377 deposit accounts with an aggregate balance of need additional funding in the form of debt and/or deposits to $50.7 million. Six years later, at the end of 2012, there were 31 support a growing asset base. greenfield MFIs in 12 Sub-Saharan countries with 769,199 loan accounts and an aggregate loan portfolio of $527 million, and Growth and Operational Performance with 1,934,855 deposit accounts and an aggregate balance of • The greenfield MFIs have generally achieved impressive $445 million. These 31 greenfield MFIs had 11,578 staff and growth, with the average MFI having 36,714 loans, $20 million 701 branches, and are becoming noteworthy collectively and in loan portfolio, 81,682 deposit accounts, and $23.1 million in some cases individually in their markets. deposit volume on the books at 60 months. Nevertheless, the ranges of values within the cohort hint at the diversity in lending 2. Greenfield MFI Performance and deposit mobilization strategies among greenfield MFIs. The life cycle of greenfield MFIs, as it is observed in SSA, can be divided in three stages: foundation (preparation and first • The growth numbers are a reflection of the ability of greenfield year of operation), institutional development (year two through MFIs to build out distribution networks and train staff while financial breakeven, which typically occurs in year 3, 4 or 5), and maintaining robust operational control. At 12 months of scale-up (from financial breakeven onwards). The performance operation, greenfield MFIs have on average 131 staff and 9 of greenfield MFIs largely reflects these three stages, each of branches; at 60 months of operation, they have on average 524 which is characterized by milestones related to management, staff and 31 branches. It is important to note, however, that product development, infrastructure build out, outreach, the rate of branch expansion varies greatly between credit-only funding structure, and sustainability. institutions and regulated deposit taking-institutions. It requires much more planning and investment, and sometimes regulatory The performance of the cohort of greenfield MFIs was evaluated approval, to set up deposit taking branches. Regulated deposit- based on institutional age in order to achieve a coherent taking institutions in the cohort opened on average 11 branches comparison and aggregation of data, regardless of the calendar in the first five years, whereas credit-led models opened 75. year in which they launched operations. • Staff development is critical for sustained growth. During A comparison to MIX data for ‘young’ African MFIs (those the first 3-4 years, successful loan officers are promoted to with 48-84 months of operations) shows that greenfield MFIs supervisors, branch managers and regional managers, slowly have achieved, on average, a very robust performance. By replacing international staff (typically there will be only one, the time greenfield MFIs reach 60 months of operations, they perhaps two, international staff left at 48 months). Staff have attained considerably larger size, greater reach, higher productivity levels have improved steadily among greenfield Performance of Greenfield MFIs at 12, 36 and 60 months Month 12 Month 36 Month 60 MIX Young Africa No. Staff 131 318 524 69 No. Branches 9 22 31 10 No. Deposit Taking Branches 3 7 11 n/a No. Non-Deposit Taking 22 47 63 n/a Branches No. Loans Outstanding 9,495 25,009 36,714 11,255 Gross Portfolio ($ million) 2.3 9.2 20.0 2.7 No. Deposit Accounts 7,123 37,460 81,682 18,127 Deposit Volume ($ million) 0.8 8.7 23.1 2.0 PaR30 3.9% 4.0% 3.4% 9.5% Op. Expenses / Avg Portf (%) 200% 53% 36% 113% Equity ($ million) 3.6 4.3 6.6 1.2 Net Income / Avg Assets (%) -12.4% -0.1% 3.1% -2.4% Net Income / Avg Equity (%) -44.6% -0.3% 18.9% -3.4% *n=58 African MFIs between 48 and 84 monthshs MFIs in SSA (as measured by the loans-to-staff ratio) but the To date, there have been few exits from the holding companies. It cohort has nevertheless struggled to reach the same productivity seems likely that the investment time horizon may be a few years numbers as in other parts of the world. Group lenders tend to longer than initially anticipated, suggesting that it takes more have a significantly higher loans-to-staff ratios. effort and more time than anticipated to build successful MFIs of significant size. Financial performance • The research shows that the greenfield MFIs in the cohort have Some common success factors and challenges include: been able to sustain fairly rapid revenue growth over their first 60 • The operational success factors most often cited by holding months, increasing on average by $500,000 every 6 months and companies themselves as critical are standardization of operational reaching $5 million by the 5-year anniversary. However, greenfield procedures and systems. In the long term, the holding companies MFIs typically experience significant swings from profits to losses contend that human resource development is key to success. and back to profits during the institutional development period. Only around month 42-48 do they emerge fully self-sustainable. • It is important that the shareholders involved, at the holding level and MFI level, have a similar long-term strategic vision for • For the cohort, both portfolio yields and operating expense ratios the network and its MFIs. If so, most disagreements will be about are high relative to mature MFIs in other regions of the world, tactics and can be easily resolved. which ranged from 11%-16% in 2011. To align performance with MFIs in other regions, the greenfield MFIs in SSA will need to • A clear vision and mission centered on creating and managing further reduce the operating expense ratio by 10-20 percentage MFIs enable coherent long-term decision making for building points, something which may not be easy given the high costs of appropriate expertise and capacity at the holding company doing business in the region. necessary to successfully guide the network. 3. The Holding Company • A strong sponsor commitment, sometimes secured through Greenfield MFIs belong to a larger network or holding company, direct financial involvement, is especially important when things which through common ownership and management plays are not going as well as hoped and sponsors and key staff are a strong role in backstopping operations, providing standard asked to go the extra mile without necessarily being immediately policies and procedures, staff development and training, and compensated. co-branding the subsidiaries in the network. There are generally three types of holding companies: • Several networks identified the regulatory and supervisory regimes as a challenge to their activities. Political instability adds Consulting firm-led, founded by specialized consulting firms for further challenges to the business environment in SSA and has the purpose of investing in and building a global network of imposed heavy costs on some MFIs and holding companies. subsidiaries, e.g. Access Microfinance Holding, Advans SA SICAR, MicroCred SA. Network support organization-led (NSO-led), established to • All in all, the holding companies report that the cost of doing consolidate the affiliates of international microfinance networks business in SSA is decidedly more expensive than their operations and expand with new greenfield MFIs, e.g. FINCA Microfinance in other parts of the world. Holding Company, Opportunity Transformation Investment. Local bank-led, expanding mass market operations of an existing • Some holding companies said it is more challenging to create traditional bank by creating specialized MFIs, e.g. EcoBank MFIs in SSA compared to other parts of the world under overly International. ambitious expectations about financial performance from investors. Investors Development Finance Institutions (DFIs) have played a key role 4. The Role of Greenfield MFIs in Market Development in creating and supporting most of the networks that today Qualitative and quantitative research in DRC, Ghana and launch greenfield MFIs. The holding company model has Madagascar, where at least two greenfield MFIs have been provided DFIs with a single vehicle for making larger investments operational for more than 5 years, shows that greenfield MFIs in microfinance and leveraging their participation with other play various roles in the development of the market for financial investors. The holding companies are also seen as providing services for those at the base of the pyramid. In addition to a relatively feasible exit route when DFIs believe their role has improving access to finance they also increase the level of skills been completed, as shares in a geographically diversified holding in the financial sector, introduce new products and channels to company are thought to be easier to sell than multiple small the market, and expand the number of access points for clients. investments in frontier countries. Equally important, DFIs want to create commercial incentives to ensure the full engagement of Market relevance the sponsors. The holding company arrangement has engaged The greenfield MFIs in the DRC, Ghana and Madagascar the consulting firm and NSO sponsors as shareholders in the represent only a small portion of total financial sector assets, but holding company, where they stand to gain or lose along with they are significant players in terms of numbers of households the other investors. and enterprises served. They also manage a significant number of branches and employ a significant number of employees The second largest group of funders in the holding companies relative to the financial sector overall. These effects are observed and the greenfield MFIs is socially responsible microfinance most clearly in countries with a less developed financial sector. investment vehicles (MIVs). They tend to prefer the holding In post-conflict DRC the four greenfield MFIs served 89,942 companies for diversification and liquidity, and typically see their microenterprise borrowers and 265,741 depositors at the role more as providing expansion capital than venture capital. end of 2011, representing about 50% of all borrowers in the Private commercial investors have also shown interest in the microfinance sector and 65% of the depositors served by holding companies, as well as small individual investors. microfinance institutions. Skills building 5. Conclusion By their own account, the greenfield MFIs’ most The greenfield model has come a long way in a short significant effect on market development is through time in SSA. The sustainable performance of greenfield their contribution to the professional development of MFIs illustrates to the traditional formal banking sector staff in the banking and microfinance sectors. With the that underserved businesses and households are exception of a small number of international staff, all bankable and even profitable market segments. Now 11,600 employed in greenfield MFIs as of December the question is, where does the model go from here? 2012 were nationals. Since mainstream banks and other financial institutions frequently try to poach staff from The number of greenfield MFIs has expanded rapidly in greenfield MFIs it appears that this skills development the last decade and new entities are still being added results in considerable positive externalities for the to this segment of the microfinance industry. It is likely, financial sector as a whole. Some holding companies however, that the rate of creation of greenfield entities, calculate that they will train two to three times the at least in SSA, will slow, as the most ‘feasible’ markets number of required staff to address expected attrition have now largely been entered. But this leaves about 25 to local financial institutions. For greenfield employees, countries in SSA without any greenfield MFI presence, the greenfield MFIs appear to provide a career bridge and typically without the presence of any sustainable between the less formal microfinance sector and the MFIs at all. more formal banking sector. One challenge for greenfield MFIs and their holding Product and Channel Diversification companies is therefore to develop a delivery model that Greenfield MFIs tend to be at the forefront (compared facilitates commercially viable and affordable access to other MFIs) of introducing innovation in low-income in smaller more dispersed markets and rural areas. retail banking. The greenfield MFIs have introduced Indeed, some of the more mature greenfield MFIs that new products, credit policies and service standards that have achieved breakeven are now exploring alternative have been replicated by other financial institutions. For delivery channels, such as agent banking and mobile example, in the DRC ProCredit introduced free savings financial services, to extend their reach in markets with accounts without a minimum deposit requirement at a low population densities which present challenges for time when most banks had minimum requirements of traditional bricks and mortar expansion models. more than US$1000. ProCredit attracted large numbers of savers and demonstrated that the Congolese At the same time as the holding companies and population was able and willing to save. Following this greenfield MFIs face significant operational challenges example, other banks, like Rawbank and BIAC, relaxed (and opportunities), they will also have to manage their their account opening requirements and the number investors’ expectations, particularly those of the DFIs. of deposit accounts in DRC has grown from 30,000 Proof of concept now has to give way to mass market in 2005 to 1 million in 2012. Additionally, greenfield reach and shareholder returns. participation in credit bureaus, when available, helps to build the foundation for a strong credit culture and promotes responsible finance for the market as a whole. The full study is available on the Resources link of www.ifc.org/financialinclusionafrica. For further in-depth analysis on the performance of greenfield MFIs in Africa, and a comparison of their performance against other institutional types, please refer to the forthcoming World Bank research paper “Benchmarking the Financial Performance, Growth, and Outreach of Greenfield Microfinance Institutions”. Authors AKoblanck@ifc.org | +27(0) 11-731-3000 JULIE EARNE is a senior microfinance specialist at IFC. She is a co-author and co-editor of the acclaimed World Bank publication The New Micro- finance Handbook. TOR JANSSON is a principal investment officer at IFC’s Johannesburg office leading investments in the microfinance sector in Sub-Saharan Africa. IFC, Sub-Saharan Africa ANTONIQUE KONING is a microfinance specialist with CGAP and manages CGAP’s microfinance program in Africa. Contact the Publisher: MARK FLAMING was an independent consultant at the time he worked on this paper. He is now COO of MicroCred Holding. The Partnership for Financial Inclusion aims to scale up commercial microfinance institutions and advance mobile financial February 2014 services to bring financial services to 5.3 million previously unbanked people in Sub-Saharan Africa by 2017. It is a $37.4 million initiative by The MasterCard Foundation and IFC that brings together the intellectual and financial capital of the Foundation with IFC’s market knowledge, expertise and client base. The partnership is also joined by The Development Bank of Austria, OeEB, and collaborates with knowledge partners such as the World Bank and CGAP. An important objective of the partnership is to contribute to the global community of practice on financial inclusion, and to share research and lessons learned. This publication is part of a series of reports published by the program. To find out more, please visit www.ifc.org/financialinclusionafrica