How can a microfinance institution (MFI) achieve sustained profitability while continuing to responsibly serve a wide range of target clients? This is the question Advans Côte d’Ivoire, an Ivoirian MFI, has faced since its creation. In 2017, after less than six years of operation, the MFI achieved a return on equity of 19%, while continuing to target Small and Medium Enterprises (SMEs), microbusinesses, farmers and village savings associations, amongst others. So, what are the barriers to profitability in the Ivoirian market and what are the keys to such a success?
Despite the post-political crisis context, the Ivoirian economy has flourished since 2012, benefitting small business owners, triggering a decline in poverty rates and in turn creating a dynamic microfinance market. The microfinance sector’s profitability is however under pressure due to the cap on interest rates charged to microfinance clients (all-in-rate at 24%) and strong competition, especially in Abidjan. Delays in the set-up of a credit bureau to monitor client over-indebtedness have increased the level of portfolio at-risk for some players.
To face these constraints, Advans focuses on controlling all other profitability levers, particularly operating, financial and impairment expenses. Firstly, stronger penetration in the SMEs market and supporting SMEs clients in their growth has improved operating efficiency. Efforts have also been made to reduce costs through retaining satisfied clients with a good history rather than continuously renewing the client base. Coupled with close control of operating costs, this resulted in an operating expense over average total assets ratio of 9% at end-2017, which is relatively low for an MFI also serving rural clients (14% of total clients).
Secondly, mobilising retail deposits has helped to lower the cost of funds. Advans has developed a wide range of deposit products, services and delivery channels to improve deposit mobilisation and client service. In addition, thanks to its performance and the attractivity of the Ivoirian market, the institution benefits from competitive borrowing rates.
Finally, loan portfolio quality and loan-loss provision remain the main threats to the profitability of Ivorian MFIs. Nevertheless, the experience of Advans shows that, with a proper lending methodology, based on transparency, a comprehensive set of policies followed by all and thorough client assessment, an MFI can maintain a strong portfolio quality. Key to this quality is also the financial education of clients and staff commitment, which are essential in entrenching an on-time repayment culture.
This sustained profitability has enabled the institution to reinvest in its staff, pay dividends, and, most importantly, develop new tailored services to continue reaching un(der)served business-owners, farmers, and their families.
Solène le Bleis
Senior Investment Officer
&
Katherine Brown
Corporate Communications Officer
Advans International