Sylvanus Ikhide

The Next Generation of Poverty Reduction Strategy Papers in Africa: What is the Role for Capacity Buiding?

In the late 1990s and at the early path of this century, most African economies embraced poverty reduction strategy papers (PRSPs) as a policy prescription out of the poverty abyss into which their economies had sunk since the early 1970s. The results from the first generation of PRSP processes have been encouraging and have acted as a stimulus for the second generation PRSPs. However, capacity constraints have tended to create difficulties for many of these countries, slowdown the pace of implementation of the PRSP, as well as undermine the achievement of objectives. This study, focusing on a sample of countries in Africa, attempts to identify and characterise the nature of capacity building constraints in the formulation and implementation of PRSPs and suggests capacity building efforts for dealing with these constraints. Four major areas of capacity constraints were identified: capacity for poverty and social impact analysis, monitoring and evaluation, absorptive capacity, public expenditure management, and constraints on prioritisation. Given funding constraints, the paper concludes by prioritising areas of capacity building interventions by capacity building institutions and donors in a bid to strengthen capacity building in Africa.

Household Over-indebtedness: Understanding its Extent and Characteristics of those Affected

Abstract Household over-indebtedness has become a matter of concern across the world, in so far, as its social implications are concerned. The objective of this paper is to provide a snapshot of the prevalence of overindebtedness, using various indicators, and describe which households are over-indebted. In terms of the National Credit Regulator indicator, 8 percent of South African households are over-indebted. Results also show that, under the unsecured debt indicator, 15.2 percent of households are over-indebted, and 11 percent of households are driven below the relative income poverty line after making debt repayments. Most over-indebted households are found in the lowest income category, do not receive government grants and have an unemployed household head.

Life cycle theory and financial sustainability of selected SADC microfinance institutions (MFIs)

The Life Cycle Theory (LCT) has been applied in business in an effort to explain the ‘birth, growth, maturation and death’ processes of firms. However, its application and relevancy in the microfinance field has not been popular. The LCT connotes that, the management of MFIs gains experience through time hence sharpen the business model and MFI financing. This allows MFIs to navigate from being small, inefficient and un-sustainable institutions into large, sustainable and financially sustainable institutions. Financial sustainability is celebrated by institutionalists for enhancing outreach to the poor in a consistent way. This makes financial sustainability a supreme MFI development lag necessary for every MFI. Evidence on whether MFIs develop towards financial sustainability has remained on the low side as research has continued to shy away from addressing this worthy cause. In an effort to explain whether MFIs mature towards financial sustainability, this study employs data from selected Southern Africa Development Community (SADC) MFIs, a deviation from a prior study which considered MFIs from across the world with high disclosure tendencies and asset values. We selected SADC MFIs (small and large) on the pretext that, SADC MFIs are typically financially unsustainable as portrayed by an earlier survey – raising concerns on their ability in serving the persistently poverty stricken region. Getting to know whether the LCT can explain financial sustainability becomes obligatory in designing intervention mechanisms. Panel regression methods adjusted for various robustness checks show that, the LCT cannot fully explain MFI financial sustainability. We note the role of MFI financing structure and efficiency measures in defining financial sustainability. Low cost financing sources (equity) support financial sustainability. Donations limit financial sustainability as they nurture dependency and inefficiency. Regulatory costs linked with deposit collection also constrain financial sustainability. We suggest the usage of low cost internal financing sources if MFIs are to attain FS. In the same realm, MFIs ought to restrain costs, whether they come from the financing side or operational side for financial sustainability to be attained. We note the need to maintain a quality loan portfolio to endorse FS.

Monetary Policy Shocks, Output and Prices in South Africa: A Test of Policy Irrelevance Proposition

The study tests the policy irrelevance proposition in the inflation targeting monetary policy environment in South Africa, as well as in the context of a dichotomy between anticipated and unanticipated policy shocks. Findings from estimates of monetary policy reaction function confirmed that an open economy implicit Taylor rule characterised the monetary policy instrument in South Africa, providing evidence that suggests that the monetary policy has, indeed, been conducted systematically on the basis of information from past inflation and the output gap. While aggregates of evidence invalidates rational expectations’ PIP proposition in South Africa, doubts exists about the capacity of inflation targeting monetary policy in curbing inflationary pressures in the economy. For policy, this study supports calls for supplementing the inflation targeting framework with targets for other real variables, such as output and employment.

The threshold effects of household indebtedness on multidimensional poverty

Purpose - The purpose of this paper is to assess the existence of critical tipping points for explanatory variables (age, government grants, education and household size) – in particular, household debt service-to-income on multidimensional poverty. Design/methodology/approach - The paper applies a generalized additive model (GAM) using regression splines on National Income Dynamics Study data to establish threshold effects of the explanatory variables on multidimensional poverty. Findings - The results show that the tipping point at which debt is associated with improved household welfare is 42.5 percent (level of debt service-to-income). With significant findings, household heads younger than 60 years of age and more children are associated with lower multidimensional poverty. Government grants may suffer from fungibility as they do not seem to be an effective tool for multidimensional poverty eradication. The ideal household size with negative significant correlation to multidimensional poverty is less than four members. And lastly, education proves to be the best instrument for households to escape multidimensional poverty. Social implications - High household indebtedness is a severe social problem. Its effects include deteriorating physical and mental health, relationship difficulties and breakdown. Significant social costs arise such as medical treatment and indirectly, reduction of productivity. Further effects on society include rising criminal behavior, children dropping out of school thereby transferring poverty to succeeding generations. Non-performing loans increase and in turn lead to reduced credit availability. The overall health of the economy is impacted due to reduced aggregate demand. Originality/value - Macro studies have demonstrated the presence of thresholds on debt analyses. However, such is not known in micro analyses, this paper attempts to bridge this knowledge gap by applying GAM for analysis of debt-poverty nexus at the micro level.

Financing MSMEs (Micro Small and Medium Enterprises) in Nigeria: Implications of Transaction Costs

This study investigated the roles of transaction costs in MSMEs access to finance. This was done by investigating the impact of transaction costs on access to credit from both MSMEs and financial institutions (commercial banks and microfinance banks). From the MSMEs’ side, borrowing experience, decision lag, firm size and borrowers’ distance to the loan office were investigated. On the financial institution’s side, active portfolio efficiency, portfolio profitability and team productivity were investigated. We used the questionnaire survey method, in-depth interviews and case studies, as well as the annual financial statements of the banks. We identified interest rate and collateral value as constraints to access to finance for MSMEs. We also found financial institutions’ attitude to MSMEs access to credit was not friendly. We also found that banks with the highest active portfolio efficiency and portfolio profitability, has the least team productivity. This shows that bank institutions in Nigeria are not all that cost effective. Financial institutions need to do more to bring down transaction cost of lending. This hopefully can be achieved by investing more in agent banking which would lower operating costs, as well as spreading risk, and ultimately increase credit intermediation to small businesses.

FINANCING STRUCTURE AND FINANCIAL SUSTAINABILITY OF SELECTED SADC MICROFINANCE INSTITUTIONS (MFIs): FINANCING STRUCTURE AND SUSTAINABILITY OF SELECTED SADC MFIs

This study analyses selected Southern Africa Development Community (SADC) Microfinance Institutions (MFIs) in delineating how commercialized financing structure relates to financial sustainability given the need to control poverty through financially sustainable MFIs. The study takes from a recent SADC microfinance survey which recommended financial rescue packages for ailing MFIs to proffer financial sustainability. This survey failed to specify the form of financing which supports financial sustainability in addition to the inconclusive and little evidence in this regard. We note that though the financing structure and the level of financial sustainability varies with countries, MFIs are generally financially unsustainable. A robust probit model framework affirms the role of financing structure on financial sustainability. Portfolio at risk, cost efficiency and costs linked to deposit attraction explain financial sustainability. We suggest the availing of more donations, upgrading risk management and improving cost efficiency to induce financial sustainability.

Why is the Cost of Financial Intermediation Rising in Botswana

The Botswana banking system has witnessed substantial deregulation in the past three decades with the entry of foreign banks, mergers and acquisitions in the banking system and policy aimed at deregulating interest rates by moving towards more market determined interest rates. These measures should increase competition and reduce inefficiency in the banking system both resulting in lower costs of financial intermediation. However, the cost of financial intermediation has not only remained high but is also rising. This work uses data from the three largest banks from Botswana to investigate the impact of bank specific, industry specific and macroeconomic factors in determining the cost of financial intermediation. Our results show that balance sheet factors, industry specific and macroeconomic variables account for wide bank spreads and hence the high cost of financial intermediation in Botswana. The paper concludes by suggesting that better focused regulatory oversights by the central bank, a reform plan that will boost the supervision of the panoply of non-bank financial institutions and a further strengthening of the fiscal and exchange rate to ensure sustainable macroeconomic position will help to contain the rising cost of financial intermediation.