Microfinance consultancy to Eastern Sudan
In 2006, the Eastern Sudan Peace Agreement was signed, ending twelve years of devastating conflict. Kassala and to a lesser extent Gedaref states were left with very limited capacity, declining institutions, inadequate and decaying physical infrastructure, eroded human capital and shattered social structures. The influx of refugees to Eastern Sudan put additional stress on the already scarce natural resources, and the conflict coincided with a severe cycle of droughts, causing additional environmental degradation and depletion.
Expectations among the peoples of the East to see their historical marginalisation reverse through tangible peace dividend were high following the peace agreement, but implementation has been slow. Poverty in the Eastern states is widespread, economic inequality is significant, and human development indicators are among the lowest in the country.
The Government of National Unity (GoNU) has a deep commitment to social development and support to the poor, but while social transfers are very appropriate in some situations, they require ongoing subsidies. To enhance the sustainability of the public social development efforts, the Government endorsed microfinance as a crucial component of its financing strategy to support poverty reduction in 2006. Unfortunately, the focus on financing for social development has led to confusion, and the difference between inclusive and sustainable financial services and social transfers has not been sufficiently recognized.
On the one hand, the Central Bank has an excellent Vision and Strategy to facilitate the development of a Good Practice microfinance industry in the country. On the other hand, commercial banks are impatiently asked to allocate 12% of outstanding portfolio to “micro-finance” within restrictive recommended profit margins, and large amounts of subsidized capital for on-lending are made available for microfinance, in most cases without sufficient training and product adaptation.
The lack of capacity building has been exacerbated by the delayed start-up of the Sudan Microfinance Development Facility co-funded by the Multi-Donor Trust Fund to provide technical assistance (and funding) to emerging microfinance providers. This intense supply-drive may be the single biggest constraint to good microfinance development in Sudan today. Comparatively less attention has been paid to the quality of the financial services provided and the sustainability of the institutions providing the services. Nowhere else in the world has a supply-driven, government-subsidised approach to microfinance provision been successful and Eastern Sudan displays no particularities that would suggest it will be successful here.
The total minimum market for microfinance in Kassala and Gedaref states is estimated to comprise some 680,000 economically active adults in around 222,000 poor households, of which the majority reside in rural areas. The key access barriers to formal finance for this potential market is the urban concentration of banks, cumbersome documentation demands, excessive collateral requirements and the subsequent high transaction costs (transport, insurance, guarantors, etc.). The existence of an informal market for financing by traders at extremely high rates indicates that there is a demand for specialized microfinance in Eastern Sudan.
But the Eastern market lacks specialized providers of microfinance services. All current microfinance providers (MFPs), whether bank branches or NGO programmes, are by international standards small and display serious weaknesses in operational, financial, managerial and strategic management capabilities.