Microfinance for the Unbanked and MSMEs
Microfinance for the Unbanked and MSMEs
Business Model Description
Deliver microfinancing products for Djibouti's unbanked population and offer financing options suitable to Micro, Small and Medium Enterprises (MSMEs) by using technology and alternative information, such as digital footprints and behavioral and psychometric analysis to support credit scoring.
Expected Impact
Enhance productivity and economic resilience of MSMEs.
How is this information gathered?
Investment opportunities with potential to contribute to sustainable development are based on country-level SDG Investor Maps.
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Country & Regions
- Djibouti: Ali Sabieh
- Djibouti: Arta
- Djibouti: Dikhil
- Djibouti: Obock
- Djibouti: Tadjourah
Sector Classification
Financials
Development need
The majority of Djibouti's banking and economic activity is concentrated in big-ticket activities, resulting in a sizeable unbanked population. Djibouti has one of the lowest levels of financial inclusion in the Middle East and North Africa region, with 12% of the working age population owning a bank account. Bank account ownership falls to 5% for the 15-24 year-old category (1).
Policy priority
To stimulate private sector development, the Government has taken steps to improve the business climate of Djibouti. Its measures include adoption of a commercial code, reductions in the cost to register a business, amendments to the fiscal code and the draft law on the privatization of state-owned enterprises (2).
Gender inequalities and marginalization issues
A large share of Djibouti's micro-enterprises operate in the informal sector, which means that funding through formal borrowing practices is low. Most micro-enterprises, female and youth-owned businesses acquire their early-stage funding through individual savings, the tontine system or their families (3).
Investment opportunities introduction
Opportunities exist in digitizing cash transfer programmes, financial education measures, automating the registry maintained by the Central Bank of Djibouti, incorporating information on MSMEs and providing credit risk information, diversifying financial instruments and collaborations between banks and microfinance institutions.
Key bottlenecks introduction
Challenges include the lack of administrative capacity; geographic and cost constraints limiting the participation of women, youth and vulnerable population's participation in financial markets; high interest rate requirements; and limited range of financial products available to customers.
Corporate and Retail Banking
Development need
The financial sector in Djibouti is dominated by banks, representing 94% of total assets of the financial system and 80% of total loans to the economy (4). Other than the banking sector, Djibouti's financial sector remains underdeveloped, which disproportionally affects MSMEs as only 13% of micro-enterprises and 39% of SMEs with less than 50 employees use a bank loan (5).
Policy priority
Promoting a single regional and inter-connected digital market, including digital payment facilitation, is one of the priority areas defined in the Horn of Africa Imitative (6). The Djibouti Vision 2035 acknowledges that constraints in access to financing limits the creation of MSMEs as well as hinders competitiveness of the private sector and employment promotion (7).
Gender inequalities and marginalization issues
Women-owned businesses, primarily micro-enterprises with higher rates of informality, have far lower bank account ownership and banking product usage. Only 54% of Djibouti's women-owned businesses have a bank account as opposed to 71% of male-owned businesses (8).
Investment opportunities introduction
Opportunities exist regarding reducing MSME lending costs, providing guarantees for equipment finance, targeting women-led MSMEs, support for non-financial services including business development, networking, financial education, and digitizing cash transfer programmes.
Key bottlenecks introduction
The current size of Djibouti's MSME market might be a significant challenge restricting foreign investors' long-term growth expectations. Additional challenges relate to the lack of administrative capacity, limited participation by women, youth and rural populations due to geographic distances, and prevalent guarantee and interest rate requirements.
Commercial Banks
Pipeline Opportunity
Microfinance for the Unbanked and MSMEs
Deliver microfinancing products for Djibouti's unbanked population and offer financing options suitable to Micro, Small and Medium Enterprises (MSMEs) by using technology and alternative information, such as digital footprints and behavioral and psychometric analysis to support credit scoring.
Business Case
Market Size and Environment
< USD 50 million
150,000 potential microfinance borrowers
Financial services accounted for 13% of Djibouti's GDP. Banking accounts for 97% of assets, followed by capital in the insurance sector with 2.5% (28).
Measured by outstanding loans, Djibouti's microfinance volume represents 0.04% of the country's financial sector, amounting to DJF 130 million (USD 750,000) (10).
Djibouti records an estimated potential of 150,000 microfinance borrowers (13).
Indicative Return
ROE of > 25%
The Regional MSME Investment Fund for Sub-Saharan Africa (REGMIFA), the first microfinance debt fund to exclusively focus on the continent, recorded 36.9% return on equity and 1.8% return on assets during the first quarter of 2021 (26).
Investment Timeframe
Medium Term (5–10 years)
The World Bank's Support for Women and Youth Entrepreneurship Project in Djibouti with a credit of 15 million USD was planned over the medium to long term, as microfinancing activities take time to generate returns (13).
Ticket Size
> USD 10 million
Market Risks & Scale Obstacles
Capital - Limited Investor Interest
Capital - Limited Investor Interest
Market - Highly Regulated
Impact Case
Sustainable Development Need
Djibouti has an underdeveloped private sector, which constrains inclusive growth in the country. The oversized public sector, which provides for 60% of jobs in Djibouti, cannot generate enough jobs for new entrants (14).
Djibouti's financial sector does not effectively support economic growth and job creation. The country has low levels of population with bank accounts, and suffers from a lack of microcredit and market diversification (10).
Informal enterprises, mostly led by individuals, represent 60% of the Djiboutian economy and are excluded from accessing existing financial instruments. Banks view lending to Micro, Small and Medium Enterprise (MSME) as overly risky, which limits their ability to access critical finance (10).
Only one-third of Djibouti’s households has access to microcredit, which was mainly provided by one of the three principal microfinance institutions providing a total of USD 12.3 million in loans (11).
Gender & Marginalisation
Gender inequality in Djibouti's labor market are substantial: only 29% of women aged 15 to 64 are active in the labor market and only 54% of women have at least three years of university studies in the labor market (compared to 76% of men) (13).
Employment disparities exist across the country where 59% of the people in rural areas are without jobs, while 37% of Djiboutians in urban contexts are unemployed (10).
Expected Development Outcome
Microfinancing provision to the unbanked facilitates the entry of informal ventures into the formal economy through access to credit and reduced exploitation of Micro, Small and Medium Enterprise (MSME) by informal credit sources that charge usurious rates of interest.
Microfinance improves access to financial information and resources for entrepreneurs and Micro, Small and Medium Enterprise (MSME).
The financing projects improve Djibouti's entrepreneurship ecosystem and contribute to job creation and economic growth of the country.
Gender & Marginalisation
Microfinancing promotes employment and the availability of financial tools for women who are largely employed in micro enterprises and in Djibouti's large informal sector.
Primary SDGs addressed
1.4.1 Proportion of population living in households with access to basic services
Only 13% of micro enterprises and 39% of small and medium enterprises with less than 50 employees use a bank loan (5) Only 54% of women-owned businesses have a bank account compared to 71% of male-owned businesses (8).
N/A
8.10.2 Proportion of adults (15 years and older) with an account at a bank or other financial institution or with a mobile-money-service provider
8.5.2 Unemployment rate, by sex, age and persons with disabilities
12.27% overall; 8.76% for women and 16.63% for men (2011) (15).
11.57% (2020) (16).
N/A
0.5% (16).
9.3.2 Proportion of small-scale industries with a loan or line of credit
26% (2013) (15).
N/A
Secondary SDGs addressed
Directly impacted stakeholders
People
Gender inequality and/or marginalization
Corporates
Public sector
Indirectly impacted stakeholders
People
Corporates
Outcome Risks
Lack of appropriate regulations for consumer protection may result in negative externalities including indebtedness, multiple lending from different institutions, and financial institutions' defaults.
Potentially low loan repayment rates - due to lack of recorded credit history - may result in high interest rates.
Banks may perceive lower demand for their traditional financing products due to the availability of microfinancing products.
Impact Risks
Djibouti's limited digital literacy from both entrepreneurs and credit providers may limit the use of innovative credit rating approaches relying on new information sources.
Impact Classification
What
Microfinance provides access to credits for income generating activities for the unbanked and Micro, Small and Medium Enterprises (MSMEs).
Risk
While microfinancing model is proven, Djibouti's low financial literacy and exposure to over-indebtedness as a result of financing products require consideration.
Impact Thesis
Enhance productivity and economic resilience of MSMEs.
Enabling Environment
Policy Environment
Strategy for Accelerated Growth and Employment Promotion (SCAPE) 2015-2019, 2014: Highlights the private sector as one of four critical axes for economic and social development, which can be strengthened through appropriate financing models (17).
National Microfinance Strategy 2012-2016, 2011: Calls for the institutionalization of a network of Saving and Credit Unions (CPEC) and the creation of accountability standards for microfinance institutions, and appoints the Central Bank to oversee the microfinance sector (18).
Vision Djibouti 2035, 2014: Acknowledges that constraints in access to financing limits the creation of Micro, Small and Medium Enterprises (MSMEs), negatively impacts on the competitiveness of the private sector and hinders employment growth (19).
Financial Environment
Financial incentives: The Djibouti Economic Development Fund is a state-sponsored partial credit guarantee fund that provides grant financing to underserved enterprises. The fund manages an outstanding loan of FDJ 7 billion (USD 40 million) which had financed 525 projects by 2018 (21).
Other incentives: The Partial Credit Guarantee Fund, launched by Djibouti's Central Bank and the Ministry of Economy and Finance in partnership with the World Bank, provides third-party credit risk mitigation to lenders by absorbing a portion of the lender's losses on the made loans (22).
Regulatory Environment
Law No. 179, 2007: Regulates microfinance activities in Djibouti (20).
Law No. 177, 2011: Regulates financial cooperatives, commonly known as Savings and Credit Unions, in Djibouti (20).
Laws No. 91 & 92, 2005: States that banking activities are regulated by the Bank of Djibouti, and provides stipulations of opening the sector to foreign investment given that the minimum capital requirements of DJF 1 billion (USD 5.5 million) are met (12).
Marketplace Participants
Private Sector
Djibouti People's Savings and Credit Bank (CPEC), Commercial Bank of Djibouti, East Africa Bank, EXIM Bank, Saba African Bank, Arab Bank for Economic Development, International Investment Bank, Bank of Africa Mer Rouge, Banque pour le Commerce et l'Industrie (BCIMR), LendoEF.
Government
Djibouti Agency for Social Development (ADDS), Central Bank of Djibouti, Ministry of Economy and Finance.
Multilaterals
Common Market for Eastern and Southern Africa (COMESA), World Bank, International Development Association (IDA), International Monetary Fund (IMF), OECD, United Nations Development Programme UNDP), International Fund for Agricultural Development (IFAD).
Non-Profit
Chamber of Commerce, Center for Leadership and Entrepreneurship (CLE), USAID.
Target Locations
Djibouti: Ali Sabieh
Djibouti: Arta
Djibouti: Dikhil
Djibouti: Obock
Djibouti: Tadjourah
References
- (1) Oxford Business Group. 2016. Growing participation in Djibouti's financial services sector due to greater competition. https://oxfordbusinessgroup.com/analysis/lending-opportunities-increased-competition-leads-increased-participation.
- (2) World Bank. 2020. Doing Business Indicator. https://www.doingbusiness.org/en/data/exploreeconomies/djibouti.
- (3) World Bank. March 2021. Djibouti - MSME Finance Needs Assessment and Policy Recommendations. https://documents1.worldbank.org/curated/en/289941616568791338/pdf/Djibouti-MSME-Finance-Needs-Assessment-and-Policy-Recommendations.pdf.
- (4) International Monetary Fund (IMF). October 2018. Technical Assistance Report - Financial Soundness Indicators Mission. https://www.imf.org/external/pubs/ft/scr/2016/cr16249.pdf.
- (5) World Bank. March 2021. Djibouti - MSME Finance Needs Assessment and Policy Recommendations.
- (6) Horn of Africa Initiative. 2020. Key Priority Projects to Deepen Regional Integration. https://hoainitiative.org/wp-content/uploads/2020/11/HoA-Initiative-KEY-PRIORITY-PILLARS-Brochure_FINAL.pdf.
- (7) Republic of Djibouti. 2014. Vision Djibouti 2035. http://ccd.dj/w2017/wp-content/uploads/2016/01/Vision-Nationale.pdf.
- (8) World Bank. March 2021. Djibouti - MSME Finance Needs Assessment and Policy Recommendations.
- (9) LenddoEFL. 2021. Scoring. https://lenddoefl.com/scoring.
- (10) World Bank. June 2018. Support for Entrepreneurs in Djibouti to Benefit 6,000 Women and Youth. https://documents1.worldbank.org/curated/en/578131520537155799/pdf/Concept-Project-Information-Document-Integrated-Safeguards-Data-Sheet.pdf.
- (11) Mohamed Abdallah Ali & Mazhar Mughal. 2019. Microfinance and Poverty Reduction: Evidence from Djibouti. https://hal-univ-pau.archives-ouvertes.fr/hal-02282359/document.
- (12) World Bank. March 2021. Djibouti - MSME Finance Needs Assessment and Policy Recommendations.
- (13) World Bank. May 2018. International Development Association Project Appraisal Document On A Proposed Credit In The Amount Of Sdr 10.5 Million (US$15 Million Equivalent) To The Republic Of Djibouti For A Support For Women And Youth Entrepreneurship Project. https://documents1.worldbank.org/curated/en/462471527192967678/pdf/DJIBOUTI-PAD-05212018.pdf.
- (14) Djibouti Department of Statistics and Demographic Studies (DISED). 2016. Situation de l’emploi à Djibouti en 2015.
- (15) UN Global SDG Database, 2021. SDG Indicators. https://unstats.un.org/sdgs/indicators/database.
- (16) Sustainable Development Report. 2021. Country Profiles: Djibouti. https://dashboards.sdgindex.org/profiles/djibouti.
- (17) Government of Djibouti. 2015. Strategie de Croissance Accélérée et de Promotion de l'Emploi. https://economie.gouv.dj/wp-content/uploads/de95d383afef8bcbe0a3bc609a7f5c76.pdf.
- (18) Government of Djibouti. 2012. Strategie Nationale de Microfinance 2012-2016. https://www.adds.dj/wp-content/uploads/2013/06/DOCUMENT-DE-SNMF-VERSION-FINALE.pdf.
- (19) Republic of Djibouti. 2014. Vision Djibouti 2035. http://ccd.dj/w2017/wp-content/uploads/2016/01/Vision-Nationale.pdf.
- (20) Central Bank of Djibouti. February 2016. Atelier sur l'élaboration d'une stratégie pour l'amélioration de l'inclusion financière dans la Région du COMESA Présentation Pays: Djibouti. https://cmi.comesa.int/wp-content/uploads/2016/03/Djibouti_Regulator-1.pdf.
- (21) World Bank. April 2018. Djibouti Support for Women and Youth Entrepreneurship – Combined Project Information Documents. http://documents1.worldbank.org/curated/en/654131524315527206/pdf/Project-Information-Document-Integrated-Safeguards-Data-Sheet-Djibouti-Support-for-Women-and-Youth-Entrepreneurship-P165558.pdf.
- (22) World Bank. March 2016. Innovative MSME Finance shows promise in Djibouti. https://www.worldbank.org/en/news/feature/2016/03/22/innovative-msme-finance-shows-promise-in-djibouti.
- (23) Adaptation Fund. 2020. Project Proposal to the Adaptation Fund Integrated Water and Soil Resources Management Project. https://pubdocs.worldbank.org/en/200001613671982816/14538-2021-02-17-AF-Djibouti-PROGIRES-signed.pdf.
- (24) Mohamed Abdallah Ali, Mazhar Mughal. 2019. Microfinance and Poverty Reduction: Evidence from Djibouti. https://hal-univ-pau.archives-ouvertes.fr/hal-02282359/document.
- (25) Abdoulkader Warsama Afasseh. 2012. La microfinance et lutte contre la pauvreté: le case de Djibouti. https://www.memoireonline.com/09/13/7367/m_La-microfinance-et-lutte-contre-la-pauvrete-le-cas-de-Djibouti15.html.
- (26) Regional MSME Investment Fund for Sub-Saharan Africa (REGMIFA). 2021. Quarterly Factsheet. https://regmifa.com/wp-content/uploads/2021/08/Factsheet_Q1_2021_V01.pdf.
- (27) Africa Private Equity and Venture Capital Association. July 2021. FMO Invests US$10mn in the Regional MSME Investment Fund for Sub-Saharan Africa. https://www.avca-africa.org/newsroom/member-news/2021/fmo-invests-us-10mn-in-the-regional-msme-investment-fund-for-sub-saharan-africa-regmifa.
- (28) Oxford Business Group. 2016. Growing participation in Djibouti's financial services sector due to greater competition.