(Ecofin Agency) - Microfinance has become essential for giving unbanked people access to financial services. However, the rise in unpaid loans is threatening the stability of many institutions, especially in fragile economic environments.

The West African microfinance sector has shown both promise and vulnerability this year. According to new data from the Central Bank of West African States (BCEAO), unpaid loans in the microfinance sector jumped by 6.2% in the second quarter of 2024. This increase highlights the challenges borrowers face in repaying their loans, which has weakened the sector’s credit portfolio.

As of June 30, the gross portfolio deterioration rate—a key measure of financial health for decentralized financial systems (SFDs)—rose to 7.9%, up from 7.6% in the previous quarter. This figure significantly exceeds the maximum threshold of 3% recommended across the West African Monetary Union (WAMU). Experts warn that this trend could strain microfinance institutions as they juggle growth, risk management, and governance challenges.

Mixed Growth Across the Region

Despite these issues, microfinance activity in the WAMU region grew modestly last quarter. Outstanding loans increased by 1.7%, reaching CFA2.56 trillion, while annual growth surged by 14% as institutions met the financing needs of people excluded from traditional banking. Deposits also climbed by 2.8%, totaling CFA2.42 trillion.

The sector serves nearly 19 million clients through 539 institutions and over 4,900 regional service points, reflecting its crucial role in financial inclusion. However, growth remains uneven across countries. Senegal led with loan growth of 5.9% and deposit growth of 3.1%.  Côte d’Ivoire saw modest gains, with loans up 0.5% and deposits up 2.6%. Burkina Faso experienced a 0.6% decline in loans despite a 3.8% increase in deposits. Mali recorded the steepest decline, with loans falling by 2.1%. Benin and Togo posted steady growth, while Niger and Guinea-Bissau struggled to balance loan and deposit growth. 

Gender and Rural Gaps Persist

The BCEAO report also highlights gender disparities in the sector. Women hold just 21.2% of deposits and receive only 19% of loans, compared to men, who dominate with 43.8% of deposits and 52.3% of loans. Rural areas, often served by community-based organizations, remain underserved, despite their reliance on agriculture and other key industries. 

For decentralized financial systems (SFDs), the low representation of women presents a real opportunity for growth. By focusing more on this group, SFDs could diversify their loan portfolios and promote greater financial inclusion. Moreover, specialized products like agricultural microloans could address the specific needs of rural communities, particularly in countries such as Niger, where agriculture is the backbone of the economy, explained a microfinance expert based in Lomé.

Microfinance institutions still tend to prioritize short-term loans, with 49.7% of their lending focused on short durations, compared to only 20.2% allocated to long-term loans. While this approach helps reduce risks for the sector, it limits the ability of SFDs to fund large-scale development projects, such as those in agriculture or real estate, which require longer and more stable repayment terms.

The situation with deposits reflects a similar trend: 55.4% of funds are held in demand accounts, showing a preference among clients for immediate access to their money rather than locking it in fixed-term savings. On average, each client holds a deposit of CFA127,746 and takes out loans worth CFA133,925, suggesting that most transactions are geared toward meeting short-term cash needs rather than long-term investments. While this structure provides flexibility for clients, it limits the resources available to SFDs, hindering their ability to issue long-term loans essential for regional economic development.

Regulation: A Key to Stabilizing the Sector

Regulators are paying close attention to these imbalances and have stepped up efforts to stabilize the sector. In the second quarter of 2024, eight microfinance institutions in the WAMU region were under provisional administration, down from thirteen a year earlier. This reflects ongoing regulatory efforts to address the decline in loan quality. However, as one expert pointed out, these measures alone are not enough. “Additional risk management and recovery strategies tailored to local realities are needed to stop this deterioration,” he warned, recalling that just a few months ago, a microfinance leader in Togo faced severe penalties for non-compliant practices.

Although microfinance accounts for only 5.4% of deposits and 7.2% of loans in the WAMU region, it has tremendous potential. In a region where traditional banking services remain out of reach for many, microfinance continues to play a crucial role in bridging the financial gap.