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Sierra Leone: Microfinance Demand and Stakeholders' Perceptions of Impact

Sierra Leone: Microfinance Demand and Stakeholders' Perceptions of Impact
By Kenday S. Kamara, October 2008

With a population of about 6 million people, composed of 20 ethnic groups, "with Temne (30%), Mende (30%), Creole (10%) and Other (30%) making up the composition; and with an estimated 935,800 households, Sierra Leone has one of the lowest human development index (HDI) with economic growth estimated at 5.5 percent and inflation at 2.2" (UNDP). The country is scarred by a decade long civil war. And since January 18, 2002 when the war was officially declared over, majority of Sierra Leoneans are today still struggling and in dire conditions.

The persistence of poverty is causing irreversible harm to the Gross Domestic Product (GDP) of Sierra Leone and the good life of her people. The level of poverty and the extreme low levels of incomes due to massive unemployment in Sierra Leone exceed colonial levels by over 60 percent and is not getting better. The country has been classified by a United Nations Human Development Report "as one of the poorest countries in the world with widespread poverty, high infant mortality rate about 182/1000 and life expectancy, among the least in the world, about 38 years; low adult literacy rate estimated at 30% while only 35% of the population had access to safe drinking water in 1998" (UNDP). The country was ranked bottom of the 177 countries listed in the UNDP's Human Development Reports from 1991 to 2004. 

The economic costs of unchecked poverty trends will be severe. In the late 70s and the 80s, the widespread students' discontent in the country anticipated the nemesis that befell the country in the 1990s-which could be rightly described as "the age of consequences" when the country had to go through the most brutal civil conflict in modern times claiming thousands of lives with many thousands losing their limbs and causing severe economic losses and the effect on the country's GDP extremely damaging. What this indicates is that the persistence of poverty is creating major security risks and the pervading scenarios of resource scarcity is only causing increased mortality rates as a consequence of unmitigated disease proliferation under extreme conditions.  

The social indicators of development in Sierra Leone that fell drastically in the course and aftermath of the 10 years scourge the country underwent putting Sierra Leone at the bottom of UNDP's Human Development Index has not changed much today. More than 80% of the population still falls below the poverty line of $1 per day. Containing poverty, therefore, will require increasing the current levels of support programs that target poor and very poor populations in Sierra Leone and also support increase of women's access to financial services.

Microfinance support structures, for instance, have been found to be quite relevant to poverty alleviation and gradual and steady development in developing countries. And it is no rocket science the way microfinance works: micro loans provided to multiple beneficiaries through microfinance support channels are used as revolving investment funds benefiting many beneficiaries all at once.

However, considerable leadership and organizational development work has to be done to build the capacity of microfinance institutions and micro-financed beneficiaries in Sierra Leone. This is necessary for the microfinance support machine in Sierra Leone so that it exists in a way that it feeds on the success and growth of microfinance supported programs. The growth of microfinance supported programs would translate to supporting more microfinance outreach programs to benefit more Sierra Leoneans thus fueling the engine of economic growth. Periodic programs impact assessments are necessary as well to assess whether microfinance supported programs have had the desired impact on beneficiaries and on the economies of beneficiaries' in various communities. 

Per capita poverty in Sierra Leone today is four times as dismal as those in countries like Ghana, Nigeria and Senegal and 10 times as dismal as those in Botswana and South Africa. Sierra Leone is renowned for widespread corruption and as one of the world's most corrupt countries with a per capita income to be the lowest in the world. The current administration must therefore urgently implement a durable national strategy to address the persistent poverty threat through well regulated microfinance structures.

The youth, women and children are by far the most vulnerable to poverty. Widening unemployment increases the mortality rate, and worsening GDP devastates the country at gargantuan proportions. Emerging graduates from higher institutions of learning and vocational institutes are also highly vulnerable to the fallout from the widening unemployment rate in the country, including lack of savings, inadequate healthcare, and almost zero productivity in all sectors of the economy. These categories of unemployed are understandably loath to bear the burdens of the transitioning new political leadership while a whole new crop of politicians continue to corrupt apace.

Launching an effective regime for robustly coordinated microfinance structures presents an opportunity for APC leadership. The APC leadership must strive to bring microfinance channels into a system that establishes the common understanding for the widespread development impact of microfinance loans being one of the main ways beneficiaries create employment for themselves and be able to overcome food insecurity, address emergencies, and pay for medical and lifecycle expenses. With an efficiently regulated microfinance supply structure, the social impact of microfinance growth can also be seen in the growth of education and in the number of children able to complete secondary education in beneficiary communities. Further, microfinance stakeholders would become empowered in terms of increased self-esteem gained from being able to provide for their family and increased decision-making at the enterprise level.

Untapped Potential

Sierra Leone can learn a great deal from Latin America and East Asia's experience with successfully active microfinance programs. "The largest distribution of loans and mobilization of savings in terms of GNP are recorded in South East Asia (Thailand, Bangladesh, Vietnam, and Indonesia), and Latin America (Bolivia, Honduras, Panama, Jamaica, and Colombia)".

Sierra Leone's microfinance sector, on the other hand, is at a very nascent stage, composed of a mix of projects coordinated by NaCSA (National Commission for Social Action) and some international and other local NGOs. About 60 microfinance NGOs, projects and programs in the country are coordinated by NaCSA's Social Action and Poverty Alleviation (SAPA) program (a government run retail MFI). Only 10% of financial services to micro and small businesses were estimated in 2003.

A distinguishing characteristic of Sierra Leone's financial sector is its high exclusivity, mostly serving the middle class, supporting high margin type enterprises and people with guaranteed salaries. The economic activities of commercial banks are primarily on treasury bills rather than investing assets on business sector lending. 

Effort to develop the microfinance sector in order to create an inclusive financial sector that has the potential of directly impacting at least 20% of the total population in terms of income and employment generation in a sustainable manner is a sound approach. The relevance of microfinance to economic development is evident and the gradual integration of microfinance into high level commercial financial activities of banks is key to building an all inclusive financial system.

"NaCSA is a governmental body that was established as a 'Social Fund' in November 2001 by an Act of Parliament as the successor to the National Commission for Reconstruction, Resettlement and Rehabilitation (NCRRR). The NaCSA Microfinance Program (MFP) is primarily a technical assistance and training vehicle for building a viable, sustainable and growing microfinance sub-sector. It operates with its own staff and through the NaCSA network of 16 decentralized offices." A recent ACP-EU-supported national survey of MFIs coordinated by NaCSA evaluated the degree of transparency of reporting processes and the kind of increases in efficiency and progress towards operational self-sufficiency these MFIs are making. The March 2008 survey outcomes were meant to determine the kind of sustainability objectives to be pursued. Data from the national survey are meant to be used to increase the effectiveness of ACP-EU interventions in terms of capacity building, internal controls and promoting a customer orientation.

Given the unique nature of the ACP Business Climate Facility (BizClim)-an ACP-EU joint initiative financed under the 9th European Development Fund (EDF) as a proactive capacity building international development program-the NaCSA coordinated survey project provided the opportunity for ACP-EU to play a leadership role in helping to develop a shared understanding of sector needs and gaps, and to provide vision and strategy for bridging challenges. The ACP-EU values the strategic and deliberate setting of objectives, specific policy replication activities and targets, and building capacity. The ACP-EU survey thus made an assessment of the strategic positioning and comparative advantage of ACP-EU in the broader microfinance context in Sierra Leone and vis-à-vis other players in the microfinance arena. It also examines the relevance and significance of ACP-EU investments and technical assistance to ACP-EU-funded microfinance programs.

ACP-EU has offered its capacity (of programs flexibility and professionalism) to contribute to microfinance development and to help Sierra Leone meets her Millennium Development Goals (MDG) measured in terms of cutting poverty in half by 2015. Sierra Leone has need for support to diversify her community level economies and economic activities if it is going to meet her MDGs. ACP-EU has a distinct capacity to innovate in this area by using the best means available (a microfinance demand and supply survey) to find out about the programs impact of microfinance in Sierra Leone by asking the various stakeholders for their perceptions. Ahmed Saybom Kanu, Administrative Officer for Statistics Sierra Leone explained in a meeting with the author of this essay "that the issue of micro credit has greater sociological dimensions. How these dimensions are looked at, varies. Therefore, it is good to learn more about microfinance and how the sector can be expanded with greater outreach."

Unfortunately, former president Kabbah's NaCSA squandered an opportunity to properly manage the resources provided by the ACP-EU that could have helped underwrite the transition to a vibrant micro financed economy: instead of efficient management of micro loans, it opted for the politically expedient path of giving away micro loans without proper loan management mechanisms. Many of the microfinance beneficiaries, particularly party affiliates, reacted by misusing micro loans resulting in billions of leones used in misplaced priorities. The Kabbah government had less motivation to impose stringent microfinance-efficiency standards, let alone be transparent and conform to ACP-EU standards.  The current APC leadership should now be expected to actively debate the capacity of NaCSA on the development of a vibrant microfinance sector. The emphasis should be on creating opportunities for the poor and low income people. In that regard, the country's large informal structure needs to be stimulated and developed through a well coordinated microfinance supply system to absorb huge numbers of the population to become gainfully self employed. "Estimates are that the informal sector accounts for at least two-thirds of the total labor force, and 70% of the urban labor force. More than half the population is under 20 years of age. Of the total population around 65 percent lives in rural areas" (UNCDF).

The Microfinance Landscape

 The commercial banks are both major players in the Sierra Leone economy and the country's leading lending institutions. Commercial banks' leadership will therefore be indispensable in the creation of a national regime to coordinate microfinance opportunities. But commercial banks have shown little or no interest in microfinance and they hesitate to help establish a national system capable of channeling the necessary funds to microfinance activities. These banks provide mostly basic financial services with a client base of about 85,000 clients.

Fortunately, the Sierra Leone Commercial Bank (a bank partly owned by government) is beginning to recognize the growth potential of microfinance alternatives. The bank has created opportunities in microfinance borrowing using a group-guarantee methodology with loans to be provided to groups. Also, the other government owned banks, the National Development Bank (NDB), the National Cooperative Development Bank (NCDB), and the Bank of Sierra Leone's community (chiefdom) pilot banks have involved in wholesale and retail finance to MFIs.

The government needs to support the enabling environment to expand the landscape of microfinance operations in Sierra Leone by providing tax breaks to mainstream commercial banks to encourage these banks to support innovations in the area of microfinance. Greater involvement of mainstream commercial banks in microfinance lending should be more than sufficient to quickly transform the nation's microfinance infrastructure from a relief orientation to a self sustaining business-like orientation. The greater involvement of commercial banks strategy will complement the effort of institutions like World Hope International (WHI); the Association of Rural Development (ARD); the American Refugee Committee (ARC), and the Grass Field Women's Development Association which transformed itself into PRIMED (Promoting Initiatives for Micro Enterprise Development) which have been the most recognized microfinance institutions in Sierra Leone.

The government should also take advantage of the potential of the two indigenous financial mechanisms that provide access to credit-the Osusu or rotating savings and credit associations (ROSCAs) and moneylenders. The ROSCAs are common throughout the country and they serve as mechanisms for people to save for medical, bundu society, bride price, or school fees. The moneylenders found throughout the country (with the common terms of borrowing being a 2 for 1 system) have also been crucial in providing microfinance to hardworking Sierra Leoneans at the informal level. The government should provide formal support mechanisms to directly encourage the development and growth of the activities of these ROSCAs and moneylenders rewarding those ROSCAs and moneylenders that successfully manage high numbers of beneficiaries. This performance-based support system would allow ROSCAs and moneylenders to compete for funds by implementing government microfinance goals through a combination of creative ROSCA and money lending initiatives, including the creation of ambitious innovative enterprises and the implementation of regulations that allow high recovery rates. ROSCAs and moneylenders are potential developers of microfinance facilities. Their innovative lending technologies will need to be supported by sustained government subsidies to help them grow and become affordable enough to formalize their activities.

Furthermore, the government should support research and development on and the deployment of innovative microfinance lending technologies and legal status. The need for a fully operational credit bureau to improve the flow of information on current and potential bank customers is becoming even more relevant.

Expectations of the Commons

Microfinance and the enhanced self-esteem that comes with it is the Holy Grail for economic development in Sierra Leone. By meeting microfinance start-up, expansion, consolidation, and integration are sufficient ingredients to support national economic growth. With the capacity to develop and test products in existing markets and new markets the economy booms and repayment of microfinance loans is ensured. Various client-built awareness programs can also be benchmarked from elsewhere to make MFI programs effective in Sierra Leone.  The financial flows from microfinance activities would provide a national macroeconomic shock absorber, with more funds from recovered micro loans automatically flowing to growing the economy.

Further, successes of successful MFIs need consolidated. Also, strengthening MFIs and using the right organizational formalization and industry norms (management oversight, organizational policies, procedures and systems) are required. When the productivity of MFIs is increased their scale and scope grow and prices should be adjusted to ensure profitability.  Again, the convenience of a special regulatory framework in place for MFI growth will sow seeds for growth and the ambition to venture into new markets.

MFIs should be integral to the formal financial sector. Understanding, therefore, the volume of demand for microfinance can help determine sources that can finance their growth. Demand oriented products can be introduced in communities and in turn successful MFIs in these communities can pay taxes and licensing fees to government to support national economic growth. Also understanding the banking system in Sierra Leone and the modalities involved in providing financial services to poor and low income people can finance growth and attract capital from private capital markets and deposit takings from the public.

Addressing opportunities and constraints for development of the microfinance sector in Sierra Leone is critical. There is a high unmet microfinance demand in the country. By getting to know the gap between the demand and supply of credit for micro and small business activities, to understand the impact of ROSCAs and traditional money lenders to microfinance in Sierra Leone is also critical. The private sector has literally been found to be the engine for growth in developing societies as well as developed societies. But if microfinance beneficiaries can only be financed by collecting cash collaterals then the very essence of microfinance is negated. Grants and soft loans to help build the capacity of microfinance operations in the country are necessary and they define the very essence of microfinance - character and capacity building to help the hopeless succeed in generating income for themselves and to manage their income competently. With microfinance, Sierra Leoneans lacking adequate subsistence and living in poverty are given a chance to start somewhere. The success of microfinance sustains real national economic growth.

And perhaps, however, the most daunting concerns about microfinance is the question of regulation. Microfinance beneficiaries could simply be tempted to renege on their obligations to repay micro loans, undermining the very concept of micro financing completely. Most fundamentally, they would jeopardize the collective benefits of the national microfinance regime. Therefore, the incentives to develop a credit history must be strong, and the price of default in lending must be high. Capacity building of regulatory authorities and development of effective regulatory tools (also a salient recommendation by the 2008 ACP-EU BizClim financed national survey) is essential for effective regulation of microfinance.

As microfinance institutions face increasing demands to put in place stringent regulatory measures, the primary enforcement strategy for dealing with recovery of microloans is to impose the threat of temporary exclusion from the microfinance regime and the loss of future access to micro-credit opportunities. Uncooperative beneficiaries would also lose access to high volume investments, for instance, in the mining and agricultural sectors.

The time has come for the government to enable the growth of microfinance lending technologies. A national microfinance enabling regime would serve the nation's economic interests by promoting innovation and opening up new opportunities and services.  Based on the outcomes of the recent ACP-BizClim-supported microfinance demand and supply survey of microfinance beneficiaries and MFIs, demand shows the distinctiveness to be greater than total supply. Strong commitment to sustainability and increased outreach as well as profitability and scale are emphasized.  The industry needs considerable support to build capacity, capital base and plans for expansion. The concept of microfinance itself is cost-effective in terms of contributing to development and poverty alleviation. Dollars invested are used more than one time. To therefore foster growth of microfinance, character and capacity building infrastructures need to be supported. Character and capacity building supportive infrastructures have the potential "to bring microfinance institutions to such a scale that they can play a role as an integrated part of the broader financial sector.  Successful implementation implies the identification of constraints to sector development and a concerted effort to put in place the various building blocks needed to help bring microfinance to scale and to support financial sectors to become more inclusive" (UNDP).

About the Author

Kenday S. Kamara is a freelance development consultant in administration, policy development and capacity building. He can be reached at kenday.kamara@waldenu.edu.

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