Where Should I Locate My Microfinance Institution?

>> Authored by Patrick Mfossa

Geographic targeting is the first step towards implementing a client-centered microfinance institution. Before focusing on how to effectively serve people living in poverty, it is important to reach them in the first place. While the MoMF Pro-poor quiz is designed to give an idea of types of principles, practices and indicators that should be evaluated when a MFI is seeking to improve its impact on the poor, this post is basically about the location of such institutions.

The last few decades have witnessed the rapid emergence of the microfinance industry. In Cameroon, this rapid growth started in the early 1990s on the basis of laws n°90/053 of December 19-1990 on freedom of association and n°92/006 of August 14-1992 on cooperatives and common initiative groups. Like most of those born in the late 1980s and living in developing economies, I was witness to the remarkable development of microfinance in my country. Later on as a junior consultant for a firm dealing with MFIs, I was given the opportunity to travel to several regions of my country and during which I noticed the uneven implantation of these Institutions.

According to 2011 official statistics, the 500 legal Microfinance institutions in Cameroon operate through a sum total of 1000 branches nationwide. They serve 1.5 million customers and size 15% of deposits (FCFA 400 billions) and 10% of loans (FCFA 230 billions) of the Cameroonian banking system. As shown on the map below, a greater majority (87%) of MFIs Head-quarters are concentrated at the bulged part of the national triangle.

When looking at the geographic location of MFIs of a given country, it is important to distinguish the geographic location dynamics of MFI’s Head-quarters from the one of branches. Here is the main question for us to consider: High urbanization or population density, what should be considered when analyzing the location dynamics of MFIs?

In Developing Economies, while high population density does not necessary means high urbanization rate, localities with high urbanization rates do have a high population density.

A major challenge in the practice of microfinance is bringing the banker and the client together efficiently. Poor people cannot afford to travel long distances to meet their bankers. Public transportation can be as expensive, as can be missing a day of work (Roodman and Qureshi, 2006).

Many studies (Banana skins, 2011; Kalala, 2006; Diakité, 2007) point out the fact that a great majority of Microfinance Institutions affect their inefficiency – in terms of transaction costs – on the interest rates they charge customers. As Dehem and Hudon (2012) argued, there exist only one global way of reducing this inefficiency without spoiling their flexibility & service quality nor dumping costs on clients. It would be to make sure that every organization is located at the right place and uses the right model in the sense of an adapted intermediation.

Although a good number of elements can be used to explain the geographical location of MFIs, population density and urbanization rate seems to be the most relevant. Since the success of microfinance has so far stemmed from its proximity to clients, MFIs usually adopt models that can enable them maintain both effective decentralization and ability to cope operationally.

The right location therefore should be where clients’ and MFIs’ transaction cost is lowest. This can only be made possible if the institution is located in region with a high population density. By so doing, not only does the MFI reduce its transaction cost, but it also redistributes its fixed cost on an important number of small transactions.

Looking at the microfinance industry in Cameroon in terms of location, one can notice that the geographic position of MFIs head-offices is significantly “urbanization rate” oriented while regional branches’ implantation is more likely “population density” sensitive. The two curves of the graph below are somewhat synchronized, confirming the assumption that regions with high population density attract more MFI branches than those with low density.

The only exceptions to this rule seems to be the Far North region where, despite a population density of 101.6 h/km2 has only 3% of legal MFIs branches, the Centre region with a density of only 51.1 h/km2 houses up to 22 % of MFIs branches and the South-West region with a density of 54.7 h/km2, captures up to 10% of the legal MFIs branches. This can be explained by the nature of income-generating activities – IGA – established in these localities.

In the Far North region, out of a total population of about 3,480,414 inhabitants, 2641 383 (approximately 76%) live in rural areas where agriculture and animal husbandry are the main activities. This region thus attracts mostly MFIs specialized in rural finance. These include “social NGOs”, which are often “Microfinance components” of development programs. Since they do represent a relatively small proportion of the total legal MFIs of the country, this region therefore attracts only a small proportion of MFIs branches despite its high population density.

Bar Graph

The Centre region, displays a whole different configuration. Indeed, approximately 75% of the 3,525,664 inhabitants of this region live in urban areas where income generating activities are widely developed. Such entrepreneurs and business owners are the primary target of most of these legal MFIs. Furthermore, despite its low population density compared to that of the Far North, the truth is that the Centre region is built around Yaoundé, the main country’s town having the highest population density, and thus attracting a greater number of MFIs branches.

In the South-West region, the population is equally distributed between urban and rural areas. While urban areas attract MFIs specialized in financing Very Small Businesses, rural areas attract those specialized in rural Finance. The impact of the location of large farms such as the Cameroon Development Cooperation (CDC) is that it attracts relatively more MFIs than the rural part of the Far North despite its low population density.

Due to the high population density of most of its divisions, the Far North Region might be one of those right places to locate; but because of the nature of income generating activities operated there, the main challenge now is to determine the right model to adopt for an appropriate intermediation.

Country population density: 41.6

WHERE TO LOCATE A MFI reviewed_01

Patrick Mfossa is a young economist interested in topics related to strategic interactions between banks and MFIs. He is the coordinator of MicroRev, a student-lead network dedicated to questions related to microfinance in Sub-Saharan Africa at the Congolese-German Centre for Microfinance.

3 Responses to “Where Should I Locate My Microfinance Institution?

  • Abdoul Fatahi
    6 years ago

    Good article Mr. Patrick Mfossa. Having keenly gone through your article İ realised that besides population density and urbanisation rate a third parameter which you stated but omitted to analyse as a determinant of localition is “the rate or nature of economic activities”. MFİs’ clients should be income earners in the first place to require financial services. This cannot be related to urbanization as urbanisation is enhanced by the public administration. We will be appreciative if you could enrich us with an analysis of this 3rd factor on location.
    Furthermore İ’ll like to question on the net effect of population-density driven location and saturation of MFİ in a given geographic location. İn your text you state that a great number of these MFİs are concentrated in the bulged part of the map.

  • Patrick Mfossa
    6 years ago

    Well Mr Abdoul, the type of economic activities also matters when analyzing the location dynamic of MFIs. In fact, by taking a look at the above map, one can notice that while many divisions have approximately the same population density, they do not attract the same proportion of MFIs branches. This can be explained by the fact that most of the models use by these institutions are tailored for a limited number of income generating activities.
    In Cameroun ,such activities are widely spread in the bulged part of the national triangle (precisely in the Foundi, Wouri, Fako, Mezam and Mifi divisions) and lead therefore to a geographic concentration of the competition between MFIs. While competing in a very restricted geographic zone for the same customers, these are given the possibility of contracting many loans from different MFIs simultaneously.
    Since for a given client such loans lean on the same income source, geographic concentration of the competition between these institutions may definitely leads to an over – indebtedness crisis.

  • Patrick Mfossa
    6 years ago

    The right model to adopt for an appropriate intermediation is a central question which also need to be discussed.

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