MFIs Breaking Down Barriers to Financial Inclusion in Benin

Mélina Djre|Dec, 2013

Date: December, 2013

Benin is a small country characterized by its sizeable informal economy and the substantial share of GDP generated by the agricultural sector. Poverty remains high, especially outside urban areas and one third of the Beninese live below the national poverty line. The agriculture sector is working to maximize its potential through increasing the level of processing of agricultural products. In this context, and in the absence of a national strategy to further financial inclusion, our tools help understand the key role played by MFIs to meet the populations’ needs and the rising potential of mobile agents. These tools provide a view onto more than 1,200 financial service provider (FSP) locations as well as a series of socioeconomic data such as poverty rates, population density, and mobile phone usage, which will help to identify the more promising channels for reaching rural areas.

Widespread presence of microfinance institutions (MFIs) in the least served areas

The limits of the banking system to respond to the financial needs of the middle to poorest classes have driven the development of MFIs, which offer savings and loan products targeted at these markets. MFIs have a strong presence across the whole country. Their points of service (POS) account for nearly three-quarters of all FSPs’ POS. This is also true within every department except in the urban center of Littoral, where they account for only 42% of all FSPs . MFIs are thus able to reach portions of the population who have weak literacy rates, live in rural areas or have less access to infrastructure, such as electricity and roads.

By overlaying the number of geo-coded FSPs’ access points with the percentage of population that has ever received a loan from a financial institution in Benin (click here to learn more), we can assume that most of these loans have been provided by MFIs due of their strong presence. This is further supported by the fact that mobile money providers don’t provide loans, with possible exceptions in Littoral, Borgou and Oueme where banks have most of their branches. In Donga, the department with the highest percentage of people who have obtained a loan from a financial institution (Figure 1), 86% of FSPs are MFIs. This department, where 69% of the population is rural, is primarily an agricultural economy and one of Benin’s important cotton production areas, one of the country’s main export crops.

Figure 1: Breakdown of FSPs in Donga

Overall, the average percentage of people who took out a loan in Benin (as of 2011) is 19%, however the statistics vary between departments. In looking at some of the different data layers, there may be some correlation between poverty rates and the percentage of people who have ever taken out a loan. For example, Kouffo presents both the highest poverty rate in the country, 46.58%, and the lowest percentage of individuals who have ever taken out a loan, 4%; while Donga, whose poverty rate is on the lower end of the spectrum shows a significantly higher percentage of people who have taken out a loan, 65%. When looking at numbers of access points, however, Kouffo has over twice as many MFI POS than the more sparsely populated Donga, 100 versus 42, who has a more diverse set of FSPs including greater commercial bank and mobile money presence. This then begs the question, with a higher population density and greater MFI access points in Kouffo, why aren’t people borrowing? Conversely, are these poorer markets using more savings versus credit? Or is borrowing in Kouffo concentrated in a very small segment of potentially overindebted individuals? These findings highlight the need for more data on clients and products to better understand the types of clients these MFIs currently serve and how they might be able to target greater numbers of underserved people with the right products and services.

Despite the MFIs’ proximity to underserved populations, the microfinance sector faces two major challenges:
1. Benin has many small institutions and some have trouble complying with the prudential ratios while others are not yet regulated. Benin is one of the last countries of the West African Economic and Monetary Union (WAEMU) to have adopted the new microfinance law in 2012. According to this law, the institutions operating with no legal recognition (generally prevalent in rural parts of the country) have been given two years to either close down, merge with other existing institutions, or become regulated. Will the implementation of this provision of the law significantly reduce the access to a complete range of financial services in rural areas? Or will it help foster and support a more stable system where MFIs can thrive and potentially even expand further?

2. The loss of customers’ confidence in the sector is the second challenge. ICC Services, a financial intermediary collecting savings and provides investment services, was registered in Benin in 2006. Four years later, it turned out to be a financial Ponzi scheme. Numerous small savers lost all their savings when it collapsed and this led to increased distrust in unregulated MFIs, even the ones offering legitimate services.

Although Benin hasn’t developed a formal financial inclusion strategy, the government has a keen interest in supporting the microfinance industry. In 2007, a policy document for the development of microfinance was developed with a view of enhancing the access of low income households and micro entrepreneurs to sustainable financial services. Several key players including the National Microfinance Fund (Fonds National de la Microfinance -FNM) that provides refinancing solutions and capacity building services to MFIs; and the Project for Rural Economic Growth funded by the International Fund for Agricultural Development (IFAD) are coordinating to strengthen the microfinance industry and provide access to underserved rural areas and to the poorest. How will the roles be shared between national actors and international ones to reach this objective

A nascent mobile money sector has potential for widespread impact

In Benin, the mobile money landscape is relatively young and less developed than in other markets in the region, such as Senegal or Ivory Coast. MTN Mobile Money Benin is currently the only provider. This stems from a partnership between the commercial bank Ecobank Benin and the Mobile Network Operator (MNO) MTN Benin, who together launched MTN Mobile Money in 2010. Just like other MNOs operating in WAEMU, MTN has opted for the banking model option, where it partners with a commercial bank to request an e-money license from the central bank. MTN Mobile Money offers a range of services, including cash-in and cash-out transactions, bill payment, money transfer, airtime top up and bulk payment (i.e. for wage payment). It operates through distribution points covering all departments of the country except one, Kouffo, with one of the lowest rates of mobile phone use (55%). This coverage is partly achieved through leveraging other type of FSPs POS: the 119 access points of MTN mapped include POS of MFIs (35%) and Commercial Banks (12%).

Figure 2: Departments served by MTN

Figure 2 shows the breakdown of MTN’s POS and the number of departments served by each type. Mobile agents within MFIs and stand-alone MTN agencies serve the greatest number of departments, 11, across the country, even though MFIs still overshadow mobile agent’s presence in terms of number of service points. Electronic Voucher Distribution (EVD) points, or retail outlets equipped with a central server and a portable POS transaction terminal, a system that allows distributors to sell airtimes via their cell phones) and the Other (which refers to distributors or retail outlets not equipped with the EVD solution) both cover seven departments and have a stronger presence in the densely populated departments of Littoral and Atlantique in the South.
Not surprisingly, the greatest proportion of mobile phone users is found in the densely populated departments of Littoral, Oueme and Atlantique in the South at 97%, 81%, and 74% respectively, while the other departments as well as Kouffo (56%) in the Western area have lower rates. Donga a center north department appears as an outlier with a rate of 75%, exceeding that of Atlantique. This highlights a potential market opportunity for mobile agents to expand into those areas with high rates of mobile phone use and low mobile agent presence.

Although 35% of mobile agents are concentrated in the urban center of Littoral, the ability to partner with different types of POS (MFIs, banks) will allow MTN to start leaving its mark in the financial inclusion landscape. The majority MFI presence across the country and in the rural areas, offers the MTN a tremendous market opportunity. In recent conversations with local stakeholders, MIX learned that MTN has formalized partnerships with two additional MFIs, which have still yet to be launched.

Post offices spread basic financial services evenly across country

Despite its small size, Benin has a greater network of urban and rural branches than some larger countries in Western Africa, including Senegal. Figure 3 confirms the rural outreach of La Poste, with 62% of its points of services located outside of the densely populated department of Littoral.

Figure 3: Number of post office locations

Post offices rank second after MFIs in the departments of Kouffo, Collines and Mono, the three departments with the highest poverty rates in Benin, greater than 42%, and lowest numbers of access points. The types of financial services provided by La Poste include postal current accounts, a range of savings products, including a home ownership savings plan and savings products targeted to minors and money transfer services. Probing more to understand actual product usage at La Poste will help to clarify its role in increasing financial inclusion in these underserved areas.

Commercial banks serve primarily urban clients

As compared to the other FSPs, commercial banks are minor players in the financial sector in Benin, particularly for the informal and low-income populations. The commercial bank landscape in Benin consists of private banks concentrated in the urban areas, known in Benin as departments, of Borgou, Oueme (home of the capital Porto Novo), and Littoral (home of the largest city of Cotonou, which contains 65% of bank branches).

Figure 4: Prevalence of commercial banks by departments
The Benin banking system thus mainly serves urban clients in a predominantly rural country. As we can see from Figure 4, overall, the departments least served by FSPs have the fewest number of bank branches, a pattern similar to that observed in other countries such as Senegal and Ivory Coast.

Although commercial banks are a good channel to serve the needs of urban salaried workers or civil servants, their product offerings and limited outreach prevents them from being effective at increasing financial inclusion in the underserved areas of Benin.

MIX’s map and visualization tools highlight the combined presence of MFIs, post offices, and mobile money to assess the availability of financial services to underserved populations across the country. The current landscape definitely leaves room for new strategies and innovative partnerships. Thus far, MFIs remain a key component of the financial inclusion landscape thanks to their high number of access points and to their ability to reach rural areas. This expansive MFI network opens up a promising market opportunity for mobile money, to expand its outreach to rural areas. As MIX tracks the development of these new partnerships, it hopes to continue to incorporate more data into its tools, particularly on product usage and quality rates, to better understand the potential of each FSP type to increase financial inclusion in Benin. Stay tuned for more updates in the years to come.