Greenfield Microfinance – A Business Model for Advancing Financial Inclusion in Sub-Saharan Africa?
In recent years there has been a rapid increase in the presence and growth of greenfield microfinance institutions in Sub-Saharan Africa. Designed to expand access to financial services for the low-income market in underdeveloped economies, and often specifically targeting small scale entrepreneurs, the business model is backed by foreign-owned holding companies or networks that provide initial capital, expertise, common branding, and standard policies and operating procedures.
It first entered the African market about fifteen years ago, when the local microfinance industry was in its infancy. Today there are more than 30 greenfield MFIs on the continent, including for example AccessBank, Advans, FINCA and MicroCred in countries such as Cameroon, Democratic republic of Congo, Madagascar and Tanzania.
Has the greenfield business model worked? In Benchmarking the Financial Performance, Growth, and Outreach of Greenfield Microfinance Institutions in Sub-Saharan Africa, researchers from IFC and the World Bank, in collaboration with The MasterCard Foundation, used regressions to benchmark African greenfields relative to other microfinance providers and found that greenfields grew faster in terms of deposits and lending, improved their profitability to levels comparable to the top local microfinance institutions, and substantially increased their lending to women.
The analysis compares four types of financial institutions: formal greenfields (backed by European-based consultancy firms), organic greenfields (initially often donor-funded), local commercial microfinance banks (microbanks), and others, a category that includes credit unions, cooperatives, non-governmental organizations, other non-bank financial institutions (NBFIs), and rural banks. The comparison is based on best available indicators that proxy for growth, financial performance and outreach to typically underserved market segments for a set of twenty-six greenfield microfinance institutions that entered Africa from 2005.
Outreach: To determine outreach, the researchers looked at average loan size divided by GNI per capita as well as the share of lending to women, as poorer clients typically absorb credit in smaller amounts and women are typically less economically empowered than men. The results generally show that organic greenfields start out making smaller loans than all other MFIs except the ‘other’ category, but that loan sizes then grow over time. Conversely, formal greenfields began by making loans of similar size to microbanks, though average loan size then declined over time. Both types of greenfields showed a positive association between capital costs and the share of lending to women, suggesting that the build-up of retail branching led to deeper outreach to female clients.
Financial performance: The regressions generally show a strong tendency for weaker initial financial performance by greenfields than other MFIs, but sustained improvement over time, even reaching levels comparable to established microbanks by the end of the period of study. Looking at non-performing loans (NPLs), greenfields have maintained lower shares of at-risk loans than other MFIs since 2005. There is however, a correlation between deeper outreach and higher non-performing loans for greenfields over time, which ostensibly reflects the risks of issuing smaller loans – though both types of greenfields began from very low NPL levels like most new market entrants, so some increase was possibly inevitable.
Growth: All MFIs increased their loan portfolios over time, but formal greenfields expanded their loan portfolios at a rate faster than all other MFIs. Greenfields that made heavy capital costs investments also tended to have larger loan portfolios, both relative to other MFIs and to other greenfields. The analysis found a tight association between capital costs and total deposits for organic greenfields, and that yearly increases in total deposits were significantly larger for formal greenfields than all other MFIs. The patterns are consistent with the notion that greenfields were effective in establishing a strong retail presence within a short period of time, with capital investments paying off in terms of growth in loan portfolios and deposits.
Overall, the study shows that at this point, the greenfield model, and particularly the formal greenfield model, has been an effective and profitable means of broadening financial inclusion in Sub-Saharan Africa within a short time period. As many of these greenfields now explore the opportunities offered by alternative delivery channels, it will be exciting to see how much further they can serve to expand financial inclusion in Africa, not least for the continent’s many small-scale businesses.