Assessing the viability of a rural microfinance network: the case of FONGS Finrural

LISTE OF FIGURES AND TABLES

Figure 1: Evolution of MFIs' juridical forms 2005-2010 1

Figure 2: Number of MFIs services points as of December 2010 13

Figure 3: Linkages, technical and financial flows between FONGS and FONGS FINRURAL 20

Figure 4: Membership as of December 2011 22

Figure 5: MFIs contribution to the network saving mobilization in 2011 24

Figure 6: Split of loan products in 4 MFIs in 2011 as % of the GLP 26

Figure 7: Leverage (Debt/Equity) 29

Figure 8: Portfolio At Risk over 180 days 2008-2011 32

Figure 9: Operating Expenses Ratios 2009-2011 34

Figure 10: Portfolio yields 2009-2011 35

Figure 11: Cost Ratios 2008-2011 37

Figure 12: Returns on Assets 2009-2011 38

Figure 13: Operational Self Sufficiency 2008-2011 40

Figure 14: Breakdown of portfolio yield 2011 41

Figure 15: Social Performances of the Seven MFIs 42

Figure 16: Social performance of FONGS FINRURAL 43

Figure 17: Aggregated Index of Governance 44

Table 1: Correlations between OSS, Social Performance Indicators and Aggregated Index of Governance................................................................................................................................... .....46

CHAPTER ONE: INTRODUCTION

1.1 Problem statement

For the last two decades, the (West) African Region has been experiencing a drastic growth in the microfinance industry (Périlleux, 2010). This growth is mainly characterized not only by the creation of numerous and various microfinance institutions (MFIs) from savings and credit groups to non-bank microfinance institutions, but also by a tremendous growth in term of beneficiaries (Lafourcade, Isern, Mwangi & Brown, 2005; Labie & Périlleux, 2008).

Whereas some of these MFIs are registered and even licensed, many others still operate informally, leading to serious deficiencies and crises in the industry. One of the most recent cases is that of ICC-Services^1(*) and kinds in Bénin where more than 161 billion CFA were unfortunately robbed from public depositors (BAfD, OCDE, PNUD and CEA, 2011). In order to avoid such problems, the UMOA (Union Monétaire Ouest Africaine)^2(*), a West African monetary institution, had previously refined the legal environment of the Systèmes Financiers Décentralisés (SFD)^3(*) by reviewing the PARMEC^4(*) law in April 2007.

The Republic of Senegal was the second country of UEMOA that adopted the new law in 2008 with the appellation of law 2008-47.

One innovation in the new law is the withdrawal of Savings and Credit Groups and the necessity for basic mutuals and cooperatives to federate into unions or networks. The basic idea was to improve the microfinance industry management and make a better follow up of the MFIs. Secondly, it aimed at improving the implementation of good practices among MFIs, thus helping them to perform both socially and financially.

FONGS, a farmers' organization in Senegal decided to set up a savings and credit unions network for its members in order to facilitate their access to financial services. Those savings and credit mutuals, have started with the process to get in line with the new regulation. However, the network is not regulated yet. With regard to all the problems savings and credit unions or mutuals are facing particularly in Western Africa, it seems very important, before going further in the licensing process, to assess whether those mutuals are currently viable.

The viability issue appears important in the microfinance industry since MFIs need financial resources to continuously and sustainably provide financial services to their clients or members. To come up with this situation, MFIs use various strategies to sustain their financial resources through the minimization of operating expenses, a better financial management and good administration (Ben Soltane, 2012). As these strategies are not sufficient, MFIs need to intermediate additional resources from commercial banks, they also need assistance from donors. However, with the global financial crisis, international funds are becoming scarce and difficult to capture. Thereafter the rational becomes that financial support should be granted to MFIs holding the expected capacity of absorption and implementing governance and management mechanisms (Hudon, 2007). Therefore, MFIs have the challenge to build confidence and trust to attain their own financial sustainability, and design adapted financial mechanics to attract funds, helping them to realize economies of scale (Ben Soltane, 2012). These confidence and trust might be built if MFIs are viable, socially and economically.

The present thesis which is the result of the research effectuated in the framework of our complementary master in microfinance endeavours to give some insights about that viability issue especially within a rural microfinance network.

In this first chapter we raised up the viability issue of MFIs involved in a networking process regarding the new legal requirements within UMOA region and objectives of the study as well.

In the second chapter we presented through a literature review an overview of the current mainstreams regarding financial and social performance of MFIs, the synergies and trade-offs highlighted by scholars and practicians. Likewise, we presented both the research questions and the methodology approach used.

The third chapter depicted the microfinance industry in Senegal, the new regulation and networking dynamics.

The chapter four pinpointed the FONGS FINRURAL network as the main object of the study pertaining to operations' areas, membership along with financial products delivery and funding structure.

In the chapter five we deepened our study on the performance analysis. First we strived to assess the financial performance through four main dimensions. Secondly we discussed about the social performance and the governance issue. We tried also to build a link between financial performance, social performance and governance. Then we made a global analysis about all the results obtained.

In the chapter six we made a global synthesis of the research, the main lessons learned and the challenges for future.

* 1 Investment Consultancy and Computering

* 2 West African Monetary Union

* 3 In West African countries belonging to the UEMOA, are called «Systèmes Financiers Décentralisés» or «Decentralized Financial Systems» all the institutions that aim at providing financial services to people who don't usually have access to bank and others regulated financial institutions.

* 4 Programme d'Appui à l'Application de la Réglementation des Mutuelles d'Epargne et de Crédit.