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The Informal Sector

The Informal Sector and Microfinance Institutions of West Africa

High population growth rates, shrinking public budgets, urban migration, and negative economic growth have all increased the demand for jobs in West Africa. This increased demand cannot be met by the formal or public enterprise sector, and the informal sector has absorbed much of the shock of the economic contraction in the region. As a result, the informal sector in West African countries is quite large, accounting for roughly a third to a half of GDP and a third to three-quarters of employment.

This study profiled the informal sector in 12 West African countries, identifying the characteristics of microentrepreneurs and their enterprises, key constraints to enterprise growth, and the types of assistance programs in place. The study also analyzed nine microfinance institutions recognized as effective and assessed their outreach and sustainability on the basis of recognized best practice.

The 12 country studies were based primarily on desk studies, with field visits to Burkina Faso, Cape Verde, Guinea-Bissau, Mali, and Mauritania to verify and update information. The nine institutional appraisals were based almost entirely on field research by Bank staff and consultants, who spent considerable time at each institution talking with managers, visiting local branches, interviewing clients, and reviewing financial data.

The country profiles confirmed that the West African informal sector is large and growing, particularly in urban areas, although the sectoral concentration in trade, services, and production varies across countries. Women are important informal sector participants in all 12 countries. Key constraints in the informal sector include saturated and stagnant markets, inadequate access to credit and savings services, weak technical skills, inadequate information, and poor infrastructure. Microentrepreneurs rely mainly on family, friends, moneylenders, and tontines for financial services. Microenterprise assistance programs, although numerous, are unevenly distributed throughout the region and of varying quality.

The appraisals of the microfinance institutions gave the institutions high marks for outreach, finding that most provide financial services to very poor, underserved people in remote areas. The scale of operations generally has remained small, in part because most institutions are less than five years old and in part because of the difficulties of scaling up in sparsely populated areas. The quality of financial services offered is high: loan terms and conditions are tailored to the needs and capacities of clients; borrowers can obtain small loans using simple procedures; and requirements for loan security, character-based guarantees, collateral, and savings deposits are appropriate for local conditions. The nine institutions reviewed fare less well on indicators of sustainability. Revenues cover on average 30-40 percent of operating expenses, high administrative costs inflate transaction costs, and the expenses of employing expatriates often drain program funds.

The research raised four critical issues. First, the large size of the informal sector in West Africa indicates its importance as a major employer in the region and thus its critical role in development efforts. Second, governments could provide important support to the informal sector by creating a friendly environment for microfinance institutions. Interest rate ceilings, unnecessarily high minimum capitalization requirements, and undue restrictions on deposit mobilization undermine microfinance institutions' ability to become financially viable. Third, the research raises questions about the potential of microfinance institutions to attain financial sustainability in regions such as West Africa, where population density is low and physical infrastructure poorly developed. And fourth, the case studies raise issues about the proper role of expatriates in microfinance programs.

- World Bank, 1996

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