Microfinance in Africa: Experience and Lessons from Selected African Countries

Based on the experience of selected countries, this paper identifies the main contributors to the expansion of microfinance institutions (MFIs) in Africa , which include:

• Community based approach to MFI development characterized by development of innovative saving vehicles supported by participatory efforts in local communities to form cooperatives;
• Formalizing informal methods of financial intermediation since informal traditional methodologies by licensed MFIs are instrumental in mobilizing savings.

The paper explores the links between the MFIs and:

• Banks - With increasingly closer linkages between commercial banks and MFIs, the prospects for enhancing financial deepening have improved;
• Donors and NGOs - Credit-only schemes have been developed by NGOs, often with donor support;
• Governments - Experience with failed state-owned banks has led African governments to focus on developing regulatory and supervisory frameworks that are well adapted to supporting microfinance operations.

The paper concludes that:

• Existence and growth of cooperative banking in the microfinance sector in Sub-Saharan Africa reflects the growing demand both for savings and credit facilities;
• The group-based savings cum credit institutions rely on peer pressure and joint liability (rather than collateral) to ensure loan repayment;
• Donors and NGOs play an important supportive role in the development of MFIs in Sub-Saharan Africa as they help to disseminate best practices, build local capacity, and develop the entrepreneurial skills of borrowers.