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FINANCIAL INCLUSION IN

MALAWI (FIMA) PROJECT

SETUP AND PROGRESS TO 30

SEPTEMBER 2009

Established in July 2007, the Financial Inclusion in Malawi (FIMA) Project is currently jointly funded by UNDP, UNCDF, CORDAID, and the Government of Malawi itself. So far, a total of USD 5.7 million has been mobilized. But there is still a huge resource gap, especially now that many opportunities for financial inclusion in Malawi through innovations in technology, new products, and new service delivery channels are just emerging1.

FIMA aims to expand access to finance in Malawi as part of the Government of Malawi's efforts to halve poverty by 2015 and spur a pro-poor private sector led growth. Since 2000, financial inclusion has featured prominently in all Government of Malawi’s major policy documents as one of the strategies towards achieving a broad-based economic growth.

Based on the experience in building inclusive finance systems elsewhere, FIMA is designed to address the needs of the microfinance sector at three different levels:

Support development of policy and regulatory framework that is conducive for microfinance to grow and blossom;

Support the development of industry infrastructure; and,

Build capacity of institutions directly involved in the provision of microfinance and support innovations that will improve access to financial services.

By 31 December 20112, when it is initially planned to close, the FIMA project hopes to have generated the following results and outcomes:

Capacity of institutions operating in financial sector strengthened to increase outreach and sustainability of the sector

The number of poor households with access to savings products increased from 283,000 individuals to at least 764,000, of whom 50 percent will be women.

1 Examples include Government of Malawi’s Letter of Intent and Memorandum of

Economic and Financial Policies to the International Monetary Fund (IMF) in September 2003, Malawi Growth and Development Strategy Paper (MGDS), and Poverty Reduction Strategy (PRSP), etc. 2 See UNDP Malawi CPAP 2008- 2011

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The number of poor households with access to credit products increased from 183,000 to 494,100, of whom at least 50 percent will be women

Enhanced gender equality and women’s empowerment resulting from the formulation of necessary policy, institutional capacity and systems, which improves or increases women’s access to financial services and markets.

Linkage and access to markets and financial institutions for agro-sector increased by 33%

Strengthened capacity in Government to coordinate and manage development assistance in line with the Paris Declaration on Aid Effectiveness.

Other positive project outcomes at its planned close will likely include:

Increased flow of equity investment in and local currency lending to MFIs

Table 2 below shows the link between the Projects different components, current microfinance sector challenges or shortcomings, and its targeted results and outcome to 31 December 2011. As reflected in the table, further action is needed to create favorable conditions for microfinance to grow and thrive.

Table 2. FIMA Focus Area, Market Challenges, and Specific Objectives

Focus Area Baseline Market Situation

Key Results Areas

Specific Objectives

Facilitating policy dialogue among stakeholders

Unfavorable policy and microeconomic environment for microfinance; Perceived over involvement of the public sector in microfinance Limited or poor coordination of the sector;

Favorable policy and operating environment

Enhance the understanding of opportunities and policy-related constraints to developing an inclusive financial sector in Malawi; Improve coordination, establish standards and create incentives for investors (protect consumers)

Supporting innovation in the financial markets

Limited outreach, poor institutional performance, and weak or lack linkages between the large and well-established intermediaries with the smaller FSPs that reach mostly the poor ; Lack of well trained manpower for the sector

Increased availability of financial products and services that are suited to rural communities and poor households; Improved efficiency in service delivery;

Improve efficiency in the delivery of financial services to the poor, enhance institutional performance of FSPs, and scale-up outreach

Limited products and services; other

Improved proximity of

Strengthen the performance of FSPs

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than microcredit, there is limited offering of savings facilities

services closer to the rural population and low-income urban neighborhoods

through better-trained manpower and efficient use of technology

Absence of FSPs in rural areas, particularly small holder farming households; High interest rates and transaction fees for financial services

Improved financial and non financial capacity

Building the capacity of key market development institutions

Lack of essential market information, i.e., financial performance of FSPs, quality of loan portfolios, , outreach, socio-economic profile of clients, etc

Availability of market information and improved transparency; better measures and procedures for comparing MFIs’ effectiveness

Develop standards; Build institutional and human capacity; improve sector coordination; and encourage cooperation and formation of strategic alliances

Building capacity and supporting Financial Service Providers (FSPs)

Weak institutional capacity for intermediation; Lack of well trained manpower for the sector; and limited supply of loan capital; basic tools and equipment is lack, weak or poorly working Management Information Systems (MIS),etc

Increased accountability for results Better governance and oversight of operations

Enhance performance and sustainability of FSPs; Develop Managers and industry leadership; strengthen institutional governance

Availability of appropriate technology

Reduced transaction costs

In terms of action in this area, FIMA provides the platform and also resources, i.e., both technical assistance and capital, to enable the GoM and other stakeholders formulate appropriate legal, regulatory, and supervisory framework for microfinance as recommended in the 2002 National Microfinance Policy. From facilitating dialogue on the requirements of the sector to grow and expand, enhancing capacity for representation and coordination of the industry, to enabling the dissemination of good practices and creating fundamental awareness of the said framework, FIMA has mobilized modest funds to ensure the success of the strategy.

Furthermore, the table above also shows that by providing funds to facilitate market research and product development, as well as enable innovations in service delivery, the Project hopes to improve the efficiency of MFIs and thus overcome the current limitation of existing financial products and urban-centered outreach.

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At the micro-level, where much of the Project’s efforts are directed, FIMA is responding to a range of capacity building issues such as the continued absence of MFIs in the rural areas, lack of capital to meet demand for services and expand outreach, as well as the noted lack of an adequately trained manpower for the industry. All in all, as of 30 September 2009 and notwithstanding the considerable delay in taking off, the FIMA project had achieved considerable results in all the three areas of interest (see Table 3 below), including supporting the Reserve Bank of Malawi (RBM) to enhance its capacity to regulate and supervise microfinance institutions, facilitating innovations in service delivery, and strengthening the capacity of seven service providers.

A.1. Building retail capacity and enabling innovation

Between June 2008 and September 2009, FIMA received 25 funding requests from service providers, appraised 21, and approved support to seven. Of the nearly USD 2.3 million funding approved, USD 820,000 had been disbursed. This means that in its first full year of activity, the Project would have disbursed about USD 2.3 million in support of MFIs and key market institutions.

MFI/ Partners

Date approved

Amount Approved/ Obligated

Amount Disbursed

Pending Disbursement

Investor/ Donor

NBS Bank Grant

30-Jun-09 $199,976 $199,976 $0 UNCDF

Funding by Instrument at December 2009

CUMO grant

30-Jun-09 $133,000 $133,000 $0 UNCDF

Obligated Disbursed Percent

MLF Grant

30-Jun-09 $28,000 $0 $28,000 CORDAID

Grants $1,666,982 $1,256,106 74%

MUSCCO Grant

24-Mar-09

$185,350 $185,350 $0 UNDP

Loans $600,000 $300,000 26%

MUSCCO Loan

24-Mar-09

$300,000 $300,000 $0 CORDAID

Total $2,266,982 $1,556,106 100%

FINCA Malawi - Grant

24-Mar-09

$199,904 $199,904 $0 UNDP

FINCA Malawi - Loan

24-Mar-09

$300,000 $0 $300,000 UNDCF

Funding by Source at December 2009

MRFC Grant

12-Nov-08 $200,000 $200,000 $0 UNCDF

Obligated Disbursed Percent

MAMN Grant

1-Oct-08 $102,876 $51,438 $51,438 UNCDF

UNCDF $927,852 $669,414 41%

MAMN Grant

1-Oct-08 $102,876 $51,438 $51,438 CORDAID

UNDP $758,254 $460,254 33%

RBM Grant

1-Jan-08 $125,000 $85,000 $40,000 UNCDF

CORDAID $430,876 $351,438 19%

Pride Malawi - Grant

1-Jul-06 $150,000 $75,000 $75,000 AGFUND

AGFUND $150,000 $75,000 7%

Pride Malawi - Grant

1-Jul-06 $240,000 $75,000 $165,000 UNDP

GoM $0 $0 0%

Total $2,266,982 $1,556,106 $710,876

Total $2,266,982 $1,556,106 100%

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As of the same date, up to four new funding proposals were awaiting appraisal, including one from Capital Alliance Ltd, the Malawi Savings Bank (MSB), OIBM (Opportunity Bank of Malawi), and Fincoop Savings and Credit Cooperative Society (SACCOS), thus pointing forward to the strong demand for services and relevance of the Project. These new funding proposals also highlight the opportunities for growth for the sector.Capital Alliance, for instance, is an investment company that is looking to introduce a collective investment vehicle for Malawi’s poor and vulnerable population, and would like to be supported by FIMA in developing the product and delivery channel. MSB is seeking the help of the Fund to acquire last-mile technology and the knowledge to provide wholesale loans to the poor and vulnerable population, while OIBM has approached UNCDF Head Office to support its plans to introduce pro-poor friendly money transfer services in Malawi. The last FSP among those that have just placed a funding proposal to FIMA is Fincoop, which in addition to growth capital would like to get support to upgrade its Management Information System (MIS), bolster its rural mobile savings service, and significantly enhance its intermediation capacity.

The fact that 11 of the 25 funding proposals are from market leaders in terms of outreach, provision of credit, and savings products (see Table 4 below) not only signals the strong demand for capacity building services amongst Malawi’s microfinance institutions. These funding proposals also underscore the common challenges faced by the sector as a whole, for instance the lack of capital to finance innovations in technology.

Table 4. Malawi Microfinance Sector Client Outreach and Loans (As of 30 June 2009) Loan Amount

SR No. MFI No. of Loans Outstanding Balance (MK)

30/06/2009 31/12/2008 31/12/2007 30/06/2009 31/12/2008 31/12/2007

1 OIBM 39,505 28,550 17,313 3,623,847,231 3,107,678,453 1,477,635,705

2 MRFC 105,282 31,999 10,623 3,395,989,471 2,553,223,000 659,290,935

3 MUSCO 194579 88,275 71,825 1,947,454,283 1,605,194,790 955,890,654

4 MARDEF 154,000 136,515 843,433,471 2,553,223,000

5 FINCA MW 17,083 14,133 21,170 370,296,692 303,916,250 310,030,262

6 CUMO MW 29,548 28,997 20,603 165,884,277 184,173,597 122,000,363

7 SEDOM 11,155 10,985 10,993 160,336,544 167,970,047 159,000,000

8 PRIDE MW 13773 9,470 9,636 203,053,742 2,330,242,714 233,496,650

9 MSB 477 626 313 226,744,392 395,692,290 613,000,000

10 Micro Loan Foundation

13,668 10,677 4,126 134,528,802 91,390,050 31,331,699

11 ECLOF 3,319 3,657 4,240 39,287,850 42,005,715 45965792

12 FITSE 550 5,575 18,480,205 25,060,000 28,439,956

13 DEMAT 972 1,081 422 17,265,006 19,418,494 12,833,181

14 Touching Lives Fund

1,699 1,434 720 11,152,902 10,441,668 12,481,290

15 The Hunger Foundation

4,590 4,575 4,920 8,832,252 7,303,042 8,594,061

16 NABW 601 611 613 863,145 988,145 5,625,771

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17 Care Village Banks

7,806 13,352 2,550 27,526,958 3,675,062 3,504,003

22 Coffee SACCOS 10,677 4,126 91,390,050 31,331,699

TOTAL 598,607 382,262 187,218 11,194,977,223 13,489,311,305 4,706,948,018

It is important to note that even though these FSPs are among the best in the sector currently, however, nearly all of them have both urgent and demanding institutional building challenges. As of now, perhaps just one of the 21 leading MFIs in Malawi can compete favorably with the industry’s best regionally, leave alone globally. Most of these MFIs are still struggling to master the art of lending and mobilizing and intermediating small deposits and, thus, are still far from scaling up outreach or getting to a position where they can transform to become regulated financial intermediaries. It is foreseen that for many of these MFIs, the FIMA project will continue to be an extremely important development partner as they seek to transform.

A.2. Policy dialogue

So far the results achieved by FIMA in the policy area of its focus have been the most invisible. Yet it is in this same area of policy dialogue where the contribution and presence of FIMA in Malawi has been most effective, starting from the very early years of the project in 2007 while the country was debating a new strategy to revamp its financial sector and to make the system more inclusive. The Project is making valuable contribution in shaping appropriate new legislation for microfinance and overall financial sector policy, facilitating the GoM to acquire capacity in microfinance sector development, and providing the Malawi Microfinance Network (MAMN) with resources to strengthen its coordination role and lead in developing basic industry standards and benchmarks.

The following specific results have been achieved by FIMA in the area of policy dialogue:

Financial Sector bills

So far, the project has made significant contribution in polishing various financial sector development bills, notably the Cooperative finance and Microfinance legal, regulatory, and supervisory frameworks. Two of the Project staff, the Project Manager and Resident Advisor, for instance, were the only outside experts participating in a special committee of the RBM tasked with final scrutiny of the bills and corresponding cabinet papers pending their submission to the Budget and Finance Committee of Parliament. The major contribution of the Project to this process include a more comprehensive development of the preamble to the two bills, provision for financial sector linkages between regulated and non-regulated financial intermediaries, as well as the encouragement of second-tier financial intermediaries by outline a role for these in the bills.

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Market studies

Two major studies recently carried out to better understand financial inclusion and exclusion towards the end of 2008 and early months of 2009 reflect significant contribution by FIMA. Not only was FIMA the lucky catalysts for the Malawi FinScope Demand survey. In an admirable twist of fate, the FinMark Trust, one of the first five institutions to respond to the first Call-for-Proposals placed by FIMA in June 2008, later approached the Project with a funding proposal of its own which eventually financed the study.

But apart from supporting FinMark Trust in carrying out logistical work in preparation of the launch and national dissemination of the survey results, the FIMA team also was one of the few technical experts approached to review the initial findings of the survey prior to its publication and dissemination on 19 March 2009. This technical contribution by the Project is graciously acknowledged by the authors in the now most authoritative reference publication on financial access and exclusion in Malawi.

As for the supply-side survey, FIMA has been involved in the design of the terms of reference for the study, selecting consultant to carry out the exercise, reviewing progress in the implementation of the study, and has been tasked in the technical committee to review the initial draft publication before its dissemination to the public. In fact, in addition to being also financed by FinMark Trust, the Malawi FinScope Supply survey was itself inspired by the demand survey. The soon to be published supply survey has thus benefited even more from FIMA throughout its implementation cycle.

Financial Inclusion Policy

As part of its plan to facilitate the development of a national strategy for financial inclusion, the FIMA chose to imbed the process in the larger, on-going process initiated by the World Bank and IMF to assist Malawi develop its first-ever comprehensive financial sector development policy. The FIMA team sits in both the National Steering Committee and Technical Working Group of this process, and so far has made significant contribution towards developing an inclusive finance policy and strategy for the country.

A.3. Strengthening market infrastructure

In line with its sector-wide approach to microfinance development, FIMA also provides both technical and funding to the Malawi microfinance sector. The aims of addressing the capacity building needs of the sector are four-fold:

For coordination as a rallying point to develop collectively binding industry standards and performance benchmarks;

This being the most cost-effective platform to disseminate good industry practices and principles, and promote as well as enforce market discipline, especially in the absence of regulation and supervision by an independent entity;

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To organize practitioners so that they can speak with one voice, lobby, and advocate for policy conditions appropriate for microfinance to grow and develop; and

To encourage and facilitate cooperation and the sharing of resources in building necessary common services, for instance a credit reference bureau, or market information, etc.

Among the institutions supported by FIMA to build the microfinance market include the RBM, the National Microfinance Forum, and to a limited the Malawi Microfinance Network.

National Microfinance Forum (NMF)

In 2002, when GoM formulated its first National Microfinance Strategy and Action Plan, it also established the NMF to oversee and monitor the implementation of this plan. Due to lack of resources, however, this plan was hardly implemented and so was the Forum, which still exists today but was only resuscitated in 2008 by the Project. In 2008 as the government was planning to review and introduce new financial sector legislation of which Cooperatives finance and Microfinance are part, FIMA sponsored eight members of the Forum to undertake a study tour to Madagascar to learn from their experience. This team had since played a critical role during the drafting of Cooperatives finance and Microfinance sector bills, which are currently pending legislation to become law.

And in September 2009 FIMA facilitated and supported the executive committee meeting of the Malawi Microfinance Forum. For the remaining part of 2009, FIMA will be already scheduled technical working group meetings and the National Forum itself as they await the financial sector development policy and strategy, including the special section on national financial inclusion policy for which the FIMA team is the main champion and technical lead.

Malawi Microfinance Network (MAMN)

While still in the process of releasing funding to the network approved in June 2009, the Project has during the year to the present provided MAMN with technical assistance in developing job requirements and duties of a high-level Executive Director. The FIMA team was also part of the interviewing panel for the CEO during the actual recruitment process of the Director.

Besides these two interventions, the FIMA Team assisted the Network to prepare a more acceptable 12-month agenda and budget for CORDAID and UNDCF during the transition period, as it seeks to hire new staff and develop a more focused three-year plan. This USD 205,000 has since been approved and performance-based agreement prepared, just pending disbursement any time; as at the date of writing this report.

Previously, in 2008, the Project sponsored the current Network’s Program Officer and also acting CEO to the July 21- 8 August 2008 Boulder Microfinance Training designed for industry leaders and managers.

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As part of its own efforts to pump-prime its assistance methodology and process, FIMA supported the network to conduct a study of the Malawi microfinance market conditions in October 2008. This study, although not very well done, is the only recent and most authoritative source of industry data: distribution network, staffing levels, outreach, quality of the loan portfolio, and state of financial performance based on experience of the network’s 20 members.

Reserve Bank of Malawi

The RBM has been funded by FIMA to acquire specialized skills and knowledge in effectively supervising the microfinance sector once it becomes regulated. About USD 85,000 was disbursed to the Bank in May 2009. With this funding, the Project has enabled two senior managers in the Bank’s supervision division to attend the July 17 – 8 August 2008 Boulder Microfinance Training; a similar number were trained in 2008, thus bringing the total to four. Other activities that this funding will support include study tour to learn from countries already experienced in regulating and supervising microfinance, the development supervision manuals, and other exposure visits and participation in key conference that provide direct insight into the regulation and supervision of microfinance.

Government of Malawi

In both 2008 and 2009, FIMA has supported GoM to train a total of five senior policymakers based in the Ministry of Finance, Ministry of Industry and Trade, and the Ministry of Economic Planning and Development in microfinance, hence enhancing the national capacity for decision making concerning the sector. One of the participants just attending the Boulder Microfinance Training in July/August 2009 is now the Governor of the RBM, hence this proving to be an excellent and timely investment in the development of microfinance in Malawi. Since being appointed, the Governor has already highlighted the importance of financial inclusion to Malawi in its efforts to achieve the MGDs and halve poverty by 2015; as outlined in the country’s own MGDs.

As a result of being involved in coordination of FIMA, the Ministry of Finance has realized the need to create a permanent structure within the ministry to focus exclusively on financial sector development in the future. In the next 12 months, the GoM through the ministry has provided USD 714,000 to the Project a fact which goes to underscore its appreciation of its activities and goals.

1.2 Funding Gap and the proposal to ADB

In addition to helping close the gap in funding to various activities projected to 31 December 2011, this proposal seeks to raise USD 1 million from the ADB to increase FIMA capital base. The need for this additional capital is well explained not only by the demonstrated current demand for capacity building, but also the fact that most of the leading MFIs in Malawi will need significant investment if they are to benefit from the more supportive policy environment being contemplated by the GoM.

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The funds will enable FIMA to assist more MFIs especially, in addition to supplementing funding gaps in the areas of policy formulation for inclusive finance and the strengthening of key market institutions, i.e., the RBM and MAMN. In line with the current practice of a virtual fund, FIMA expects the Bank to release the total funding in two tranches of USD 500,000 in each of the funding period (2010 and 2011). Once approved, the Project will amend its already prepared 2010 Annual Work Plan to accommodate more activities that will be funded by the Bank in the first year. Detailed description of how FIMA will administer and account for the funds is outlined in Section 2.

B. Country Issues

Even after nearly two-decades of financial sector reforms in Malawi, a large segment of the country’s population are still without access to financial services of any kind. The latest nation-wide survey published in March 2009 indicates that more than a half of the adult population is still completely excluded. But there are also significant differences in access, with nearly two thirds of the rural population (58 percent) having no access at all, as compared to the urban population (where about 40 percent are excluded) 3. This survey in particular highlights the important role that newly emerging financial intermediaries are playing to expand access in Malawi, which some five years ago was below 5 percent of the population (UNCDF, 2007). For instance, the study shows that just 5 percent of the population has had access to credit, and notably that MFIs were giving 4 times more loans than the commercial banks.

Despite the still unfriendly operating environment and their own internal shortcomings, MFIs have emerged to also play an important role in mobilizing domestic savings in Malawi: as of 31 December 2008, for instance, just 13 of the 18 better-known MFIs in Malawi that have started offering ordinary savings accounts, held as many as 875, 805 accounts, or nearly 80 percent of accounts held by all of the eight commercial banks combined (see table below)4.

3 FinScope Malawi, (2009).

4 See DMS, (2008), “Deepening Malawi’s Microfinance Sector Project (DMS) December 31 Report, USAID.

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Significantly, this population depends on small-scale agriculture5 or micro-enterprises (which account for 38 percent of non-farm jobs)6 Of the two sectors, small-scale agriculture provide more than 80 percent of jobs, contributes 35 percent of Malawi’s Gross Domestic Product (GDP), and earns the country 90 percent of its foreign exchange. Unfortunately, the production capacity of these two sectors is presently undermined by lack of access to essential financial services.

If anything else, considering the huge chunk of the population presently excluded from financial access, the FinScope survey has helped to underscore the urgent need to find ways of improving access to finance for the rural population, which constitutes 88.2 percent of the total population.

The FIMA project’s focus on the development of microfinance sector in Malawi as one of the ways to improve financial access in the country is deliberate. The first reason for its involvement in the sector is well captured in the 2004 Ouagadougou Summit Declaration and Plan of Action7, which also reiterates the need for Africa to tap the dynamics of microfinance for job creation and income security, thus:

“… The financial systems in Africa are ill-equipped to

collect small deposits … [Hence], to enable microfinance

providers to emerge, grow, and reach out to the poor in

greater numbers, providing a diversity of demand-driven

and affordable financial services such as credit, savings,

insurance, leasing, inventory credit, and transfer …

governments need to enact [relevant and responsible

financial] policy and strategy...”

Similarly, the Second Africa Advocacy Forum held on November 14, 2002, in New York, which also discussed micro-credit as one of the viable strategies for the region in the context of realizing the Millennium Development Goals, also provides an excellent summary to FIMA’s second reason for targeting the development of microfinance in Malawi:

“… Though there is still a great need to mobilize funds to

meet the MDGs, available funds have not been oriented

towards poverty eradication… a methodology that focuses

on domestic mobilization of resources for the poorest of

the poor with the objective of strengthening their own

5 About 60 percent of the FinScope sample indicated that agriculture is their most important source of income. 6 In Malawi, between 2002 and 2006, small firms typically employing less than 20 persons were able to create jobs per year at 20.9 percent, while similar firms typically with at least 20 or up to 99 workers experienced employment growth rates of 15.7 percent. 7 African Union, (2004), “Ouagadougou Extraordinary Summit 4 on Employment

Promotion and Poverty Eradication’s Declaration: Plan of Follow-up Mechanism”, Ouagadougou, Burkina Faso.

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local institutions, i.e., microfinance, [needs to be

developed]…”

More recently, the United Nations Advisors Group on Inclusive Financial Sectors (UNAG) while urging for more concerted efforts to develop all-inclusive financial systems that also caters to the needs of the poor noted:

“…Access to financial services provides a safety net to

families, communities and countries so they can better

cope during challenging times… These financial services

support innovations in agricultural production, food

security and small-scale farming and should be considered

as an important long-term remedy to affect conditions like

those that led to the current food crisis8…”

Three other important factors influenced the Projects’ decision to focus its attention on the development of microfinance as the means to improving access to finance in Malawi. These included the fact that formal financial intermediaries that might be better capitalized than MFIs are thinly spread in Malawi, are relatively expensive to establish in rural areas where the population is sparsely distributed and where basic infrastructure, e.g., roads and communication system, are poorly developed or altogether missing, and because of high transaction costs from both the provider and client perspectives. Another important factor considered by FIMA while choosing to focus on the development of microfinance was that, formal financial intermediaries even where they are able to expand outreach still perceived the excluded population to be too risky or not viable. In addition, considering the historically wide social and cultural distance between formal financial intermediaries and the excluded population, the Project was persuaded that it would be easier and faster to bring MFIs closer to the population than the former.

FIMA’s project document is attached as Annex 1 and forms an important part of this present proposal to the AfDB.

C. Sector issues

The lack of human capital is widely recognized as the single greatest constraint to the growth of leading microfinance networks and other practitioners providing direct financial services to the poor.(5) According to some industry estimates, in order to meet the anticipated demand for microfinance, the industry will have to hire 1.6 million new loan officers in Africa, Asia, Latin America, and the Near East, assuming a loan officer to client ratio of 1 to 300.(6) Conservative estimates state that $2 billion in private investment capital is currently being leveraged for microfinance. Substantially more could

8 United Nations Advisors Group on Inclusive Financial Sectors (UNAG), (2008), “The UN General Assembly's High-level Meeting on Africa's Development Needs”, ( United Nations Advisory Group on Inclusive Financial Sectors Group: New York, United States), September 22.

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be mobilized and invested in some of the world's poorest countries but remains untapped due to the lack of institutional capacity and qualified leaders.(7) The lack of human capacity is particularly severe in sub-Saharan Africa due to the relative immaturity of the microfinance industry, a small pool of trained and certified bankers and finance experts, and the prevalence of HIV/AIDS.SEC. 3. SENSE OF CONGRESS.It is the sense of Congress that the microfinance capacity-building activities supported by subsection (d) of section 252 of the Foreign Assistance Act of 1961 (22 U.S.C. 2211a), as added by section 4 of this Act, is intended to drive innovation and provide comprehensive solutions that address the lack of human capital in developing countries, particularly in sub-Saharan Africa. Such activities should provide a regional and sub-regional approach to maximizing economies of scale and should focus predominately on educating and training African nationals in order to build capacity in the microfinance industry in developing countries, particularly in sub-Saharan African countries.

Although not really that young; with the first microfinance institutions in the country getting established in the early 1990s, just at the same time as the sector was evolving in other African countries where the system is now much better developed, e.g., Kenya, Senegal, or Burkina Faso, the microfinance sector in Malawi though promising is yet to become as dynamic. For instance, whereas these countries now have a sizeable number of individual MFIs that each serve as many as 500,000 poor clients, as yet there is no single provider in the country that has a client base of more than 200,000.

Furthermore, with regards to innovations, very few of the Malawian MFIs have started giving a combination of savings and credit, which is essential in developing a robust and self-sustaining financial system. And even much fewer still are yet engaged in the provision of remittances, micro-insurance, or applying newly developed information and communication technology that potentially could help reduce the cost of service delivery and opening new frontiers.

As shown the table below, the majority of Malawian MFIs can be classified under Tier 4 of the four major categories depending on their stage of development. MFIs in this category are not necessarily young by age, but are institutions that have not established a strong base for growing into financially sustainable financial service providers. In addition to lacking pump-primed management systems necessary to build healthy loan portfolios and increase outreach to significant scale, these Tier 4 MFIs still have a long way to adapt good industry practices and have not yet decided on their long term vision for financial inclusion.

Tier9 MFI Stage of Development

Vision and Mission

Capacity Resources Linkages

9 About 70 percent of MFIs globally are within Tier 4; but in Malawi the number represents 91 percent of all MFIs. The population of MFIs in Tier 3, Tier 2, and Tier 1 worldwide is 20 percent, eight percent, and two percent. However, the corresponding number is three percent, two percent, and four percent.

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Tier 4

Start-up MFIs. In Malawi, the following MFIs fall within this category: NABW,

ECLOF, FITSE,

The Hunger

Project, CARE

Malawi

Savings

Scheme,

COMSIP,

DEMAT,

Touching

Lives, CISP

plus

approximately

29 other

NGOs and 70

SACCOs

The major driver for action is influenced mostly by concern for the well-being of the target group; Board of directors have a strong social background or orientation; and The urge to solve the world's ills (also known as Spiderman syndrome) is strong

Building structures; Staff being recruited; and Testing of simple systems and/or tools

weak resource base; Fundraising for grants and subsidies is a big hurdle

still looking for reliable and sympathetic partners; Some contracts negotiated for internal need

Tier 3

Survival. MFIs falling within this category in Malawi include: MARDEF,

SEDOM,

Greenwing

Capital, Izwe

Loans, Select

Africa,

Fountain

Microfinance,

Citizen Loan

Capital, and

Pelton

Finance

(Malawi) Ltd.

Is refined to align properly with the long-term need to become a self-sustaining institution; First-ever strategic plan developed; Selection of the board of directors motivated by need to bring in representation from the institution's key publics, as well as to broaden experience and expertise; Full-time or professional manager(s) in place

Evolving structures; Core staff in place; MIS under design and construction; There is some limited supervision of the institution by its key publics

Mobilizing resources from partners; Both operational (OSS) and financial self-sustainability (FSS) indicators still below 60% level

Market niche is being established; Developing partnerships; and, Participating in microfinance association

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Tier 2

Growth and Expansion. Among the MFIs that belong to this category in Malawi include: FINCA, CUMO, PRIDE Malawi, MicroLoan Foundation

Is revised to reflect expansion; Second-generation or mid-term strategic plan exist; Majority of board of directors have commercial orientation; There is a cadre of management team at 1 or 2 levels of hierarchy

Organization is developed; Entire workforce has a strong performance or results orientation; MIS/IT system is developed; Organization is somehow answerable to its various publics

mobilizing external and internal sources; organization has achieved OSS of above 60% and is already at 100% FSS or fast approaching the threshold

has an established market niche; strategic partnerships are well-developed; organization participates confidently and effectively in microfinance sector association and lobbying

Tier 1

Mature. MFIs within this category in Malawi include: OIBM, MSB, NBS, MRFC, MUSCCO, and Blue Financial Services.

Is profit oriented; Has a long-term strategy plan; An entrepreneurial board of directors with real stakes in the institution is in place; Decision-making management team

Organization structures fully developed; Experienced and skilled staff; MIS/IT is fully developed; Fully accountable to various publics

mobilizing external and internal sources; Deposit-taking; Reporting profitability; Public financial reporting

Well-defined and established market; Business partnership; Influencing policy implementation

Yet it is now clear that for microfinance intermediaries to successfully expand services on sustainable terms each must acquire the following basic characteristics10, which hardly even Tier 2 and Tier 3 MFIs in Malawi have attained:

Develop innovative lending technologies that balance the needs of poor households and minimize risk to the institution

Are located close to the borrowers and loan disbursement and collection often happens within a short distance of the borrowers home or premises, rather than at the premises of intermediary

10 See FinMark Trust, (2009), Developing Inclusive Finance Systems for the Poor in Africa.

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Price products such that there is full cost recovery and some margin to enable profitability within a reasonable period of time

Manage highly efficient operations to reach very large numbers of people

Attract rather than target client

Design products that attract a diverse spectrum of population at the lower end of the market, rather than narrowly target a particular group

Provide financial services exclusively

Are able to obtain commercial sources of funding, including savings from the public, bank loans, and other market-based providers.

Among the factors that have constrained the rapid evolution of the microfinance sector in Malawi—besides the operating environment that also still requires much further improvement—include limited access to funding11. Most MFIs in the country as elsewhere in the region emerged in the early 1990s with funding largely from bilateral and multi-lateral aid agencies, at a time when the real potential of the microfinance system to expand access was still undemonstrated, and much of the effort was driven by the concern on reducing poverty.

Due to a major paradigm shift in 1993, which called for MFIs to become self-sustaining, however, most of this funding dissipated, thereby catching most of the organizations unprepared for transition. Since then, only very few of the MFIs have managed to continue getting funding and therefore able to grow and expand. But other equally binding constraints have continued to undermine the evolution and development of microfinance in Malawi.

A study conducted in September 2008 jointly by FIMA and the Malawi Microfinance Network (MAMN) identified lack of well trained workforce, especially at the management level, to be one of major obstacles to growth and expansion of the industry (see table below). Lack of skills in credit risk analysis and management is another notable area where the industry seems to be struggling to match growth with increasing risks.

Immediate Constraint to Growth

Tier 1 MFI (n=4)

Tier 2 MFI (n=1)

Tier 3 MFI (n=3)

Tier 4 MFI (n=2)

Total Mentions

Lack of growth capital 2 3 5

Lack of skills in credit assessment and risk management

1 4 4 9

Lack of adequately trained manpower

1 4 1 5 11

Lack of capital to invest in modern equipment and software

2 3 5

Lack of adequate skills / 1 3 4

11 See UNEP (2008), “Narrowing the Gap: A Survey of the Barriers and Drivers to Commercial Microfinance in Africa”, UNEP, Nairobi Kenya.

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ability in financial analysis and management

Total mentions 1 5 10 18 34

Furthermore, due to lack of adequate funds, many MFIs have not been able to train and re-train their workforce in critical areas such as financial analysis and management, as well product design and development. Again lack of funds has made expansion difficult because the MFI have not been able to acquire or install necessary management systems in tandem with growth and evolution of the sector.

These Malawi-specific results remarkably mirror the obstacles presently thwarting the development of microfinance elsewhere in Africa. A Microfinance Banana Skins Report12 in 2008 and repeated in 2009 indicates that these obstacles facing MFIs in Malawi appear to be widespread throughout the African region. For instance, too little funding was the most highly ranked constrain according to the regional survey, followed by management quality and credit risk. Following the present financial sector crisis, however, the problem of too little funding has become even more challenging to African MFIs.

Other obstacles mentioned in the two surveys, but also featuring prominently in the FIMA/MAMN study of September 2008, include lack of funds to acquire basic technology (ranked fourth in the regional list), inappropriate regulation (ranked fifth), weak corporate governance (sixth), and a not well-trained workforce (ranked seventh overall). The same regional pattern holds when obstacles are analyzed by age or stage of evolution of MFIs.

As indicated in the table above, the most affected MFIs are found in Tier 3 and Tier 4. These are not necessarily young institutions, although majority is. But for various reasons, these institutions have not yet perfected the art of microfinance delivery and are still seeking for an ideal business model.

FIMA IMPLEMENTATION CHRONOLOGY

Year Month Activity

2004 November Original FIMA Project design formulated

2005 October Microfinance sector assessment published

November 28-29 National Conference on Microfinance under the theme ‘’ Building an inclusive financial sector in Malawi’’ held

2006 - FIMA Project formulation completed

July 23-27 UNCDF Mission to Malawi

August 26 FIMA Project approved by UNCDF Investment Committee held at the conference room DC 2-26.

September 06 Project appraisal committee meeting (PAC) to assess the FIMA Project design held at the conference room DC-2603 IN New York)

September 10-14 UNCDF Mission to Malawi to facilitate the formation and organization of the FIMA Steering Committee; commence

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recruitment of project staff; raise funds and produce a project implementation.

2007 May FIMA Project document approved

June 19 Signing and launch of agreement between Government of Malawi, UNDP Malawi, and UNCDF.

September 10 - 14 UNCDF Mission to Malawi

September 13 1ST FIMA Steering Committee meeting held

October 2 Second meeting of the Executive Committee of National Microfinance Forum held at the Ministry of Industry and Trade conference room.

November 27 UNCDF Mission to Malawi

Formation and organization of the FIMA Investment and Steering Committees

November 29 2ND FIMA Steering Committee meeting held at MoF

2008 March 5 1ST Investment Committee meeting held at the DMS conference room

March 6 Technical Working Group meeting on Financial Inclusion held

March 14 RBM grant agreement signed

March 27 Technical Working Group on Financial Inclusion meeting at RBM in Blantyre

April Draft Investment Manual Produced

May 9 Technical Working Group meeting on Financial Inclusion

May 9 - 18 Technical Working Group on Financial Inclusion goes to Madagascar on a study tour

May 18 First FIMA call for proposals advertised

May 22 2ND Investment Committee held

Project investment manual adopted

Report for study tour to Madagascar on the formulation of a national for the microfinance sector in Malawi produced.

June 23 3RD FIMA Steering Committee Meeting held

June 24 FIMA First status/ progress report produced

July 21 1ST FIMA Investment Committee meeting held

July 21 – Aug 8 FIMA sponsors five participants to the Boulder Microfinance Training Institute in Turin, Italy.

August 1 FIMA Project Manager recruited

August 17 FIMA Finance and Administration officer recruited

September Situational Analysis of the Malawi Microfinance sector conducted

October Funding proposals from MRFC, MUSCCO, University of Michigan and Multi Career Education Trust appraised.

November 5 4TH Steering Committee Meeting Held

November 12 3RD Investment Committee meeting held

December Performance based agreement for MRFC signed

December 3 5TH FIMA Steering Committee meeting held

December 29 Country Resident Advisor recruited

2009 January FIMA 2009 AWP approved

January MRFC grant funding of US$ 200,000 disbursed

February Pride Malawi assessment TORs revised

February 9-13 Inventory of FSPs and review of market conditions conducted

February Mobilization and appraisal of funding proposals

March Funding proposals from FINCA Malawi, NBS Bank and CCODE appraised.

March 24 5TH Investment Committee meeting held

April Comprehensive review of TORs for the Supply Side Survey provided to FinMark Trust

April 3RD call for proposals advertised

Preparation of appraisal Summaries

Investment revised and updated

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MAMN assisted to produce TORs for recruitment of Executive Director

April 26- May 2 FIMA participates in the UNCDF Global Retreat

May Developed a more enhanced proposal writing guide and tools

May Input into the FSDS provided at the National Steering Committee and Technical Working Group Committee

May Funding of US$ 85,000 to RBM facilitated

June Provided input in the final review of financial sector bills notably microfinance and cooperatives bills

June FINCA Malawi and MUSCCO grant agreements signed

June MAMN assisted to revise budget for funding

June MAMN assisted to recruit and select Executive Director

June Funding proposals from CUMO Microfinance, NBS Bank, Microloan Foundation appraised.

June 30 6 TH Investment Committee held in Salima

July 20 – Aug 10 FIMA sponsors eight participants to the Boulder Microfinance Training Institute in Turin, Italy.

FIMA participated and presented a keynote address at the Women Economic empowerment of Women conference in Lilongwe

August 27 Participated in the review of the design of the Supply Side Survey

September Disbursement of funding to FINCA Malawi and MUSCCO US$ 199 904 and US$ 185, 350 facilitated

Prepared performance based agreements for CUMO Microfinance and NBS Bank

September 10 Facilitated and participated in the third Executive Committee meeting of the National Microfinance Committee.

September Input into the development of the prudential guidelines for the microfinance sector.

September

Appraised funding proposal from FINCOOP, YASMIN Fund and Rural Sustainable Indigenous Development CBO, and Citizen Loan Plan Ltd.