African leaders discuss the state of the African economy at the 2010 IMF/World Bank Spring Meetings. Photo: International Monetary Fund (flickr)

The Economist

The Economist

Since 2001, the budding economies of the BRICS (Brazil, Russia, India, China and South Africa) have dominated global financial headlines. But looking back, it turns out some of the so-called “African lion” economies (Angola, Nigeria, Ethiopia, Chad, Mozambique and Rwanda) were just as fierce.

Six of the 10 fastest-growing economies in the world hail from the “forgotten continent” of Africa — putting up annual average GDP growth rates of around 8 percent or more from 2001-2010. The monumental rates have even earned these sprinters a spot next to “Asia's tigers” of the 1980 and 1990s — Making Africa one of the fastest growing regions in the world, according to The Economist.

Over the past decade, sub-Saharan Africa’s real GDP growth rate jumped to an annual average of 5.7%, up from only 2.4% over the previous two decades. That beat Latin America’s 3.3%, but not emerging Asia’s 7.9%. Asia’s stunning performance largely reflects the vast weight of China and India; most economies saw much slower growth, such as 4% in South Korea and Taiwan. The simple unweighted average of countries’ growth rates was virtually identical in Africa and Asia.

That said, in the next five years Africa is set to take the top spot from Asia as the fastest-growing region in the world, writes The Economist. "Standard Chartered forecasts that Africa’s economy will grow at an average annual rate of 7 percent over the next 20 years, slightly faster than China’s."

Ironically, much of Africa's growth can be attributed to China's investment and demand for raw materials in the region. And more recently, another of the BRICS, Brazil, has been competing for assets in Africa, writes Fast Company.

The Economist also notes growing success in Africa's manufacturing sector, which Standard Chartered predicts will become "significant."

Even with challenges such as political instability, corruption and weak rule of law, the African lions have been able to compete with the economic prowess of the Asian tigers.

But before Africa's growling economies can dream of surpassing Asia's roaring ones, those structural problems will have to be fixed.

"Without reforms," The Economist says, "Africa will not be able to sustain faster growth."

A Mercy Corps small business loan helped Najeeba expand her successful baby cradle business in Kabul, Afghanistan. Photo: Cassandra Nelson/Mercy Corps

Over the past decade, Mercy Corps’ microfinance services have lent more than $1.5 billion, reaching more than one million people. Twelve Microfinance Institutions (MFIs) founded and supported by Mercy Corps operate all over the world, with 270,000 active clients — 65 percent of them are women. To better serve those excluded from formal financial services, Mercy Corps is working with these MFIs to develop and offer savings, remittances, and micro-insurance services as well.

I recently sat down with Zhanna Zhakupova and Jim Anderson who were in town for a microfinance conference hosted by Mercy Corps, to find out more about Mercy Corps microfinance programs and how the global economic crisis is impacting microfinance loans. Zhanna is the Executive Director of the Asian Credit Fund (ACF), headquartered in Almaty, Kazakhstan. Jim is Mercy Corps’ Financial Services Manager and works from UlaanBaatar, the capital city of Mongolia. Together, they have experience working in countries as diverse as Uzbekistan, Vietnam, Japan, Bosnia, Poland and Afghanistan.

Haley Dillan: Jim, tell me a little bit about Mercy Corps’ use of Microfinance.

Jim Anderson: Microfinance is an integral part of what we’re [Mercy Corps] doing as an agency. Mercy Corps works with a group of well-established MFIs to complement other programming. All these MFIs provide loans to individuals and small businesses, and in Mongolia and Indonesia our MFI affiliates also offer deposits. Many support agriculture and offer consumer loans for purposes like tuition payments and health care costs. A micro-loan can range from $65 to a Guatemalan woman raising chickens or piglets, to $7,000 for a Kazakh businessperson.

Microfinance is a great tool because, when managed correctly, it is sustainable. Projects can be established and continue on a sustainable basis: they don’t require ongoing injections of donor money. As the NGO, you create the legacy, and then it often continues independantly.

Haley: Why are the majority of loans extended to women?

Jim: Typically, women are the more common borrowers. From a broad source of statistics, women are more reliable borrowers. They invest their business profits to support the family — educating, feeding, housing, and providing health care for their children. As of this June, Kompanion in Kyrgyzstan had over 91,000 clients, of whom 98 percent were women. What’s the percentage for Asian Credit Fund, Zhanna?

Zhanna Zhakupova: About 93 percent of ACF loans are to women.

Jim: Yes, and the XacBank in Mongolia has over 63,000 clients, and women comprise about 55 percent of that. However, in certain countries, it’s not always clear that just because the borrower is a woman, she’s the one in charge of the money. In Afghanistan, for example, a female borrower may just give the loan money to her husband, and it’s hard to track that.

Zhanna: Also, men are less interested in small loans. When they think about business, they think about “big.” And after the global economic crisis, group lending has grown significantly, and women dominate group lending. Men are more reluctant to join groups.

Haley: What other impacts has the global economic crisis had on microfinance? Have you changed your lending criteria? Has it affected the ability for applicants to repay their loans?

Zhanna: As I mentioned, our portfolio has shifted towards group lending since 2008. So, yes, the global economic crisis definitely caused a shift in our lending. In Kazakhstan, the crisis has been quite severe. The GDP growth was averaging about 8 percent annually since 2000, from oil and mineral resources. A pretty strong middle class had emerged, especially in the two largest cities Almaty and Astana. The economic crisis really affected this middle class; the crisis led to a sharp decline in real estate and that hit a lot of people. It seemed like everyone had loans that were secured by real estate… and when the real estate bubble burst, MFI loans were under water.

The banks stopped lending, because real estate was the key piece of collateral for most people, and it has continued to fall in value. No one had sufficient assets to meet tougher bank requirements, and so couldn’t qualify for loans after the global economic crisis. Lenders accumulated loan repayments, but refused to relend that money, sitting on it instead of pumping it back into the economy. No liquidity — no lending — no economic development — falling living standards.

In the rural areas, lending was completely frozen. When I recently visited rural areas served by ACF, every village asked us to open a branch. Small loans were in big demand but no one was lending. Now, Asian Credit Fund has about $1 million dollars in group loans, with the average loan size at around $500 per person.

Haley: What's the difference between non-profit and for-profit microlending? Does Mercy Corps work with for-profit lenders?

Jim: Actually, microlending is for-profit in most areas of the world, particularly Latin America and Central Asia. Non-profit lenders are more often located in places like India and Bangladesh. So most of Mercy Corps' microfinance work is with for-profit MFIs, many of which source funding from for-profit socially responsible investors (SRIs).

If these SRI lenders were to calculate the true risk of the loans they’re extending to MFIs, the interest rate would be so unmanageably high — possibly 60 or 70 percent in places like Tajikistan or Afghanistan. But the individuals who invest with SRIs are willing to forgo a certain amount of return because they want to encourage social improvements by lending to developing countries. As a result, SRIs can lend to MFIs at affordable interest rates.

In order to help MFIs attract capital to expand and serve more clients, Mercy Corps utilizes various sources of investment, including equity and debt, typically with SRIs.

Haley: Is there an idea or sentiment that you are taking away from the conference?

Jim: At the conference participants included a diverse group of organizations, culturally, geographically and in terms of business models, yet we all face similar challenges and issues, and it’s great that we have an opportunity to come together and talk about that.

Zhanna: Yes, everyone was talking about development, and long-term goals.

Mary O'Grady and OpinionJournal.com discuss the historical impact of trade barriers on Latin America and if the expansion of free trade will continue in Latin America under Barack Obama or John McCain.

Watch the video from The Wall Street Journal.

Photo: Geoff Oliver Bugbee for Mercy Corps

A recent survey by the Inter-American Development Bank found that over the past two years, the number of Latino immigrants sending money home from the U.S. has dropped by more than 20 percent.

Though the amount of money transferred from the U.S. to Latin America has increased by about 1 percent to $45.9 billion, the Bank estimates that more than three million Latin American workers no longer send remittances to their home countries. Higher prices, fewer low-paying jobs, and a crackdown on illegal immigrants were cited as reasons.

The survey should be cause for concern in Latin America, where remittances have played a significant role in reducing poverty and promoting economic growth. Indeed, Professor Rafael Pampillon of Spain’s Instituto de Empresa business school notes that the total amount of remittances to Latin America is greater than the combined amount of foreign investment and development aid to the region. A May 4 editorial in the New York Times spells out the potential negative impact:

Immigrant workers are not just vital to the American economy, their money transfers are a critical bulwark against poverty for millions of people south of the border. Cutting off that lifeline will lead to more misery in some of the poorest parts of the hemisphere — and it will feed the desperation that sends more migrants to the United States.

Lucy Conger's story "The Big-Country Enigma" examines why micro-credit has flourished in smaller countries like Peru and Bolivia while remaining somewhat small in scale in countries such as Brazil.

Does both over and under government regulation stand in the way to microfinance?