The Case Study is to have its Focus for the entrepreneurs in mainly Africa who want to run a business and yet can’t afford a piece of equipment and merchandise. A research on providing equipment or merchandise to enable a project to run as a self funded profitable project. In return, a share in the project, the full costs of the asset equipment or merchandise including an interest. So, direct seed finance is not be needed in a project.

Micro finance is the provision that provides access to various financial services such as credit, savings, micro insurance, remittances, leasing to low-income clients including consumers and the self employed, who traditionally lack access to banking and related services. Its main objective is to provide a permanent access to appropriate financial services including insurance, savings, and fund transfer. It is rather an important tool for the eradication of poverty. Poor will be able to deal with emergency and also make significant investment expenditures. As Micro finance becomes more widely accepted and moves into main stream, the supply of services to poor may also increase, improving the efficiency and outreach while lowering the costs.

Keywords
Microfinance, Entrepreneurs in Africa, Funding for start-ups, Seed funding for Africans

Microfinance in Africa
Microfinance  is the provision that provides access to various financial services  such as credit, savings, micro insurance, remittances, leasing to  low-income clients including consumers and the self employed, who  traditionally lack access to banking
and related services. Its main  objective is to provide a permanent access to appropriate financial  services including insurance, savings, and fund transfer. It is rather  an important tool for the eradication of poverty. Poor will be able to  deal with emergency
and also make significant investment  expenditures. As microfinance becomes morewidely accepted and moves into  main stream, the supply of services to poor may also increase,  improving the efficiency and outreach while lowering the costs.

Microfinance  must involve the people themselves in examining the problems and  creating solutions if it is to be sustainable with those upon whom  development is targeted. To meet unsatisfied demand for financial  services, a variety of microfinance institutions (MFIs) has emerged over  time in Africa.

Need of Microfinance in Africa

  • According to survey only 6 percent of Africans borrow money to start a business where as 13 percent borrow borrow to buy food
  • 50 percent of the population live with less than 1US$ or less per day
  • Africa’s saving performance over time displays a downturn of saving rates
    over the past 3 decades
  • High Interest rates make people harder to get credit

Key Principles endorsed by the CGAP (Consultative group to assist the poor) and G8 Summit:

  • Poor People need a variety of financial services not just loans;
  • Microfinance is a powerful tool to fight poverty
  • Microfinance means building financial systems that serve the poor
  • Microfinance can pay for itself and must do so if it is to reach number of people
  • Microfinance is about building permanent local financial institutions
  • Interest rate ceilings hurt poor people by making it harder for them to get credit
  • The role of government is to enable financial services not to provide them directly
  • Donor funds complete private capital not compete with it
  • The key bottleneck is the shortage of strong institutions and managers
  • Microfinance works best when it measures -and discloses – its performance

Achievements of Microfinance in Africa

  • 164 MFIs are the most important
  • 500 MFIs belong to AFMIN (The Africa Microfinance Network) with 10 million members

With Respect to WAEMU (West African Economy Monetary Union)

  • 700 Institutions
  • 5,328 Service points
  • 10 million beneficiaries

Types of MFIs
1. Banks

  • Commercial Banks
  • Agricultural Credit Banks

2. Project/State funds

  • International ad programs
  • Para-public organisations

3. Informal Resources

  • Family
  • Traditional Savings
  • Tontines
  • Money Lenders

4. Microfinance

  • Credit & Savings
  • Direct credit

Non Government Organisations (NGOs)

Performance  of the Micro financial Institutions can be judged through their  institutional financial viability and their outreach to the poor people.  These performances could be influenced by the technical, political and  the social factors to combine traditional and modern Micro-finance  approaches.

Microfinance-How to make it success in Africa

Many  approaches have been used that ranges from the traditional group based  systems to specialized lending by banks and funded by international  Non-Governmental Organizations (NGO) financial intermediaries. Growing  linkages between MFIs and the banking system in Africa appear to be  mutually beneficial as MFIs rely on banks
for a variety of services,  including deposit facilities, liquidity management services, and  emergency credit lines to cover cash shortfalls in some cases.

OSCAL (Office of the Special Coordinator for Africa and Least developed countries)
developed four principles

  • Pooling together people’s resources
  • Relying and building upon what people know
  • Reinforcing microfinance to empower the African private sector
  • Striving for efficiency, which include maintenance of tools and better working

In  last twenty years Africa has made significant advances in understanding  and providing financial services to better advance development and  eradicate poverty. In 2006, government of Rwanda ordered to close the  country’s largest MFI’s for bankruptcy due to gross mismanagement of  funds and poor credit practices.
In Benin, there are very small  number bank branches(35 nationwide for population of 7 million) mostly  concentrated around the capital city. Against this backdrop SLCs (Saving  and Loan cooperatives) are the only MFIs that collect savings.

In  Guinea, reach of banking sectors is constrained by the limited number  of deposit money banks, and credit is concentrated on largest domestic  companies. MFIs have started to fill this gap.
In Ghana, MFIs has a  strong savings orientation and a greater role is played by Non  Governmental Organisations (NGOs). Rural and Community Banks(RCBs), The  Savings and Loans companies (S&Ls) account for most of the  microfinance activities.
In Tanzania, only six percent of the  population has a bank account. The primary sources of microfinance  services are Savings and Credit Cooperatives (SACCOs), The National  Microfinance Bank (NMB), Cooperative and Rural Development Bank (CRDB),  Akiba Commercial Bank (ACB). In addition there are few regional and  rural banks engaged in deposit-based microfinance operations which lack  branch network.

Methods in Micro Finance
To maintain a sustainable microfinance Institute various methods can be followed.
Some of them are listed below.

1. Community based Approach
Many  MFIs rely on local communities to support the development of MFIs,  outside the formal banking sector. Traditional Community based  cooperative groups such as village associations and local groups play a  central role in the savings mobilization effort and expansion of other  microfinance services. Microfinance seems to be rooted in local culture  which is more participatory because clients are more ready to identify  with and thus involve in making financial decisions and actions that  shape their life.

The Unique features involved are:

  • It is simply and easily adapted to illiterate group members
  • Promotes group solidarity, learning and establish a vehicle for
    addressing community development issues
  • Doesn’t rely on infusion of outside funds
  • Doesn’t require physical infrastructure

2. Informal Methods for Financial Intermediation
Various  Informal traditional methodologies used by licensed MFIs has been  instrumental in mobilizing savings from poor income households and  giving them access to financial services.

3. Group formation and Networking
MFIs  can use and support with regular meeting to emphasize group solidarity,  discipline and consequent repayments. Some of them are commonly focused  on women; they may also benefit other social groups.
The efforts of  MFIs to work through group schemes yield a wide range of benefits,  developed by the Grameen Bank. MFIs that serve groups and communities  could empower underprivileged social constituencies to encourage  economic development and poverty reduction.

4. Reinforcement of Microfinance to advance African Private Sector
If  Microfinance has a sustainable impact on poverty eradication, then it  must level up as into starting a private sector of entrepreneurs who  function in formal economy. It can support inventiveness for direct  supply and market linkages to small and medium businesses that targets  entrepreneurs in non-traditional, low volume but high valueadded  products in potential role growth areas of economy.

5. Prioritisation of Operational Efficiency
If  MFIs are to have a better impact on poverty eradication they must be  capable, financially viable institutions that can develop the financial  leverage to extend outreach at a sustainable level. Key Principles  include

  • Target the poorest of the poor
  • Mobilize the Savings
  • Charge less interest rates that only cover Operational Costs
  • Market Research
  • Modernizing and Spread out Operations
  • Utilizing Volunteer Staff
  • Prioritizing Women
  • Develop Monitoring and Assessment Tools
  • Investing in Training
  • Tackle the problems
  • Utilize Pre-Existing Support Organisations
  • Evade External Dependency

Table 1 Overview of African Microfinance

1. Financial Needs of Entrepreneur in Africa
Most  of the Africans lack the understanding of what it would take to  successful entrepreneurs. They lack necessary technical management  skills and confidence. They lack personal ambition and willingness for  fear of sharing ownership and failed to form partnership.
Some basic  tips to the entrepreneurs that helps in the effective handling of  microfinance activities. These will help to expand the scope that scale  up through state to the global community

  • Acknowledge and Empower African People
  • Set up Realistic Expectations
  • Perform Research
  • Approve Plans Supporting Microfinance Infrastructure
  • Start a Supportive Legal Environment
  • Develop Monitoring and Assessment Tools
  • Change the Public Structures
  • Encourage Microenterprise Initiatives
  • Reinforce Staff Training
  • Utilize pre-existing Institutions such as Postal Savings Banks (PSB)
  • Encourage Networking and Cooperation

On  part of African government, rather than viewing local entrepreneurs and  capitalists as social threats and passive owners pounded by external  forces, they should consider them as potential creators of wealth and  transformers of the same environment in
which they fight to exist.  Government leaders should adopt national development strategies that  generate an investment environment conductive to long term business  activities. This type of environment can attract a flow of better  educated professionals, administrators and technicians into private  business

In Africa, Entrepreneurs

  • Must set high Standards of Personal achievements and strive to attain them
  • Should maintain considerable ingenuity and possess business skills
  • Should take tremendous risks in experimenting with new ideas
  • Should be ready to move away from the present “Profit for self and family”
    attitude to “Profit for business growth” philosophy.
  • Must utilize higher levels of technology with proper training and
    specialization
  • Must obtain greater degrees of organisational competence and delegate
    responsibility
  • Must establish more impersonal systems of control
  • Must encourage wide range marketing

Some of the elements to be considered for a start up of an Enterprise

  • The nature of the enterprise must be appropriate in economic, social and environmental terms
  • Enterprise Policies must be flexible to facilitate local circumstances
  • It should involve features that go beyond traditional enterprise policy
  • They should have special policies and programs for the development and channelling of entrepreneur talent

Some of the Problems faced by the Entrepreneurs and the possible solutions are described below:

  • Technical Assistance
  • High Costs
  • Few Support Institutions

National trainers/counsellors can be prepared.
Implementation of successful experiences
Development of institutions for support services of technical kind

2. Entrepreneurial Attitude

  • Tendency towards isolation
  • Lack of organisation and integration

Entrepreneurial training and preparation of young people
Support to and cooperation with existing business/entrepreneurial
associations

3. Financing

  • Limited access to financing, both for start up and expanding
  • Lack of endorsement and guarantees

Association-grouping

4. Policy and Enabling Environment

  • Excessive regulations and formalities
  • Political and economic instability

Identification of specific obstacles
Recommendations for change and environment within these areas
Adaptation of legal framework

5. Market

  • Problems in acquisition of inputs
  • Lack of expertise in domestic and external marketing

Vertical Integration
Information links, regional and international links

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Sowmyan Jegatheesan
Vellore Institute of Technology

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