Microfinance Organizations in Africa: The Challenge of Transforming into Regulated Organizations

Abstract

Microfinance has been accepted as a viable approach of reaching the poor with financial services and has been linked to the growth of micro and small businesses. Motivated by the suboptimal performance of many African microfinance organizations (MFOs), because of their inability to transform into regulated entities, this chapter explores the policies that are needed for the transformation of these organizations. The results presented in this chapter show that the transformation probability of microfinance organizations is significantly improved by their state of maturity, scale of lending operations, and level of financial sustainability. The results of a simulation show that policies that concomitantly reduce financial expenses and increase the scale of lending operations of these organizations by 10 % from their existing values will most likely lead to optimum transformation of the currently unregulated MFOs. The implications of the results presented here include the need for regulatory environments or laws which acknowledge different institutional models of MFOs in African countries. Secondly, for expanding scale and improving their financial sustainability, there is a need for funding assistance to currently unregistered MFOs. Funding should acknowledge the varied financial needs, strengths, and weaknesses of these organizations at different stages of their development.