The paper first discusses price trends and the relationship between money growth and inflation. Second, it focuses on the central challenge of improving competitiveness and promoting exports to enhance growth in the economy. Finally, it reviews the microfinance sector. The study also includes the following statistical data: economic and financial indicators, consumer price index, central government revenue and expenditure, monetary survey, structure of interest rates, balance of payments, composition of imports and merchandise exports, nominal and effective exchange rates, and external public debt.


The paper first discusses price trends and the relationship between money growth and inflation. Second, it focuses on the central challenge of improving competitiveness and promoting exports to enhance growth in the economy. Finally, it reviews the microfinance sector. The study also includes the following statistical data: economic and financial indicators, consumer price index, central government revenue and expenditure, monetary survey, structure of interest rates, balance of payments, composition of imports and merchandise exports, nominal and effective exchange rates, and external public debt.

IV. The Microfinance Sector In Guinea23

A. Introduction

48. The importance of financial institutions in economic development revolves around a number of functions, including the mobilization of savings, the allocation of capital to the productive sectors of the economy, the facilitation of payment transfers, and the diversification of risk. In the least developed economies, financial systems are often characterized by a small number of formal sector financial institutions, with large credit exposure to government and government-related businesses, such as public enterprises. Microfinance institutions24 (MFIs) have emerged in many countries to provide a broad range of financial services to the lower end of the credit market, i.e., poor households and micro-entrepreneurs in both rural and urban settings, under the belief that they could implement those functions more effectively than traditional institutions such as tontiniers, money-lenders, business traders, etc. Slow economic growth in Africa is often associated with poor capital accumulation, whereas high rates of economic growth, for example in Asia, are correlated with high domestic savings rates. The role of MFIs in providing vehicles for savings may be crucial in enhancing growth prospects, while reducing dependence on aid flows and foreign capital.

49. The development and growth of microfinance institutions has not been without challenges in Guinea as exemplified by the liquidation of the largest MFI, the Crédit Mutuel de Guinée (CMG) because of insolvency. Two main questions need to be addressed in a forward-looking analysis of the microfinance sector: (i) the appropriate regulatory and supervisory framework that must be put in place to ensure the proper functioning of microfinance institutions and to prevent the emergence of systemic risks to the financial sector as a whole, (ii) the relationship between microfinance institutions and other financial institutions needs to be clearly defined for each to perform their specific economic functions and complement each other.

50. This paper looks at the specific experience of Guinea, and reflects on the experience of other countries to provide some insight to two key issues: (i) the role of microfinance institutions in economic development and poverty reduction and, (ii) regulatory and supervisory policies in the microfinance sector. The specificity of the Guinean experience, i.e., microfinance institutions of diverse nature and characteristics, the failure in 2001 of the largest institution operating in the country and, the recent development of a regulatory framework for the sector, may also provide useful lessons for other countries.

51. The remainder of this chapter is organized as follows: First, the characteristics of microfinance institutions in Guinea are presented, with a tentative assessment of their economic and social impact. Second, the major challenges facing the microfinance sector are assessed, in particular in terms of regulation and supervision. Lastly, the conclusion provides recommendations for the sound development of the sector in the coming years.

B. Background: Development of the Microfinance Sector in Guinea

52. The banking sector in Guinea is composed of few institutions. As indicated in table IV. 1, there were only 7 commercial banks in Guinea in 2002, accounting for about 60 percent of total assets of the financial system, while the central bank, the Banque Centrale de la République de Guinée (BCRG), accounts for the remainder. In 2002, credit to the private sector accounted for 70 percent of total commercial bank credit. The proportion of non-performing loans has remained in the 27–28 percent of total credit range over the last five years, reflecting lax judicial enforcement and the difficulty of commercial banks in assessing the degree of risk associated with their lending operations. This situation may be detrimental to the low-end of the credit market, with small-scale enterprises and poor households being excluded from the credit market. The development of the microfinance sector may provide a solution by focusing specifically on the low-end of the credit market, notably through a wide network of local and rural branches that commercial banks lack. However, microfinance institutions are also subject to lax judicial enforcement and client risks, and they may provide an effective response only provided adequate risk management mechanisms are in place for micro-credit, as well as sound internal control and bookkeeping practices (discussed later in the paper).

Table IV.1.

Selected Indicators of the Banking Sector in Guinea, 1997 - 2002


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Source: BCRG.

Ecobank was created on Dec. 5, 1998.

Central bank assets are on a net basis.

53. The microfinance sector provides financial services to a large number of economic agents, operating in various sectors of the economy. Since 1997, MFIs have experienced a significant development. This is indicated in table IV.2, which presents selected indicators for the largest Guinean MFIs. The remaining institutions account for a marginal portion of total deposits and loans by MFIs. Between 1997 and 2002 the importance of the microfinance sector has grown significantly: the number of beneficiaries of microfinance institutions increased by more than 130 percent, while the number of local branches almost doubled. During the same period, deposits experienced a three-fold increase, while loans increased more than 3.5 times. As a share of the financial system as a whole, the relative role of the microfinance sector has also grown. Deposits in MFIs represented 1.0 percent of total deposits in the financial sector in 1997, and 1.5 percent in 2002. The share of MFI loans in total loans of the financial sector rose from 2.0 percent in 1997 to 3.8 percent in 2002. While MFIs have benefited from various sources of funds that allowed them to expand their loan portfolio significantly above their deposit base, representatives of the sector expressed concern that the expansion of the microfinance sector is constrained today by the capacity of microfinance institutions to access capital, either in the form of deposits or in the form of short- and medium-term credit lines, in particular in a context where foreign assistance is becoming scarcer.25

Table IV.2.

Selected Indicators of Micro finance Institutions in Guinea, 1997 - 2002

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Sources: BCRG and Fund staff estimates.

Number of branches; Four institutions are covered in the sample, representing the most significant players in the sector.

The penetration rate is the number of beneficiaries divided by the number of families, assuming 6 persons per family.

54. Aside from six small and active structures, four institutions accounted for the bulk of the microfinance sector in 2002, both in terms of deposits and of number of clients. Three categories of institutions are defined in the instructions issued by the BCRG in 2002, depending on the functions they undertake. The first category consists of institutions that collect savings and allocate them to its own members, such as the Caisses Populaires d’Epargne et de Crédit de Conakry (CPEC-Co) or Yétémali. The second category groups institutions that collect deposits, and allocate them to third parties, regardless of their affiliation to the institution. The Crédit Rural de Guinée (CRG) is one of such institutions. The third category corresponds to microcredit institutions that do not collect savings, and operate with external sources of funds, for example donors’ money, such the Programme Intégré pour le Développement de l’Entreprise (Pride/Finance) and the Agence Autonome d’Assistance intégrée aux Enterprises (3AE). The agency structure of the Guinean microfinance institutions is relatively similar across institutions, with a network of local associations or cooperative societies headed by a national structure. Table IV.3 provides a detailed description of those four MFIs.

Table IV.3.

Guinea: Selected Indicators of the Four Largest Microfinance Institutions, 2002

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Source: BCRG, and microfinance institution representatives.

These institutions do not collect deposits.

The Crédit Rural de Guinée

55. The CRG is by far the largest microfinance institution in Guinea, with 107,000 members in the four regions of the country in 2002. The CRG is a limited liability company, with three groups of shareholders - local structures (village-bank type systems, accounting for 40 percent of capital), employees (35 percent), local and foreign donors (25 percent) - all three being represented on the executive board. The activities of the CRG are focused on offering access to credit to the rural poor, especially in agriculture, fishing, livestock, handicraft, and commerce, and encouraging savings in rural areas. In 2002, savings collected by the CRG amounted to GNF 4.6 billion, for a total portfolio of GNF 9.3 billion, after increasing more than 260 percent since 1997. This increase is explained by the general dynamism of the sector and by the liquidation of the CMG, most of whose clients stepped over to the CRG.

The Caisses Populaires d’Epargne et de Crédit de Conakry or Yétémali

56. Yétémali was created in July 1997, in cooperation with the Canadian government (Agence Canadienne de Développement International) with activities strictly concentrated in Conakry and its suburbs. Yétémali is a cooperative through which individuals or small organizations save and borrow in order to undertake micro-investments, as in the “solidarity group” model of microfinance. Local cooperatives are supervised by a central structure, organized like the local branches, with an administrative board, complemented by a credit committee and a supervisory board. In 2002, there were 16,650 members, and total savings credit amounted to GNF 2.17 billion and GNF 1.01 billion, respectively.

The Programme Intégré pour le Développement de I’Entreprise

57. PRIDE/Finance was created in 1992 with the support of U.S. AID to promote micro-and small businesses in urban centers throughout the country. Its activities are twofold: (i) allocation of credit to small businesses, (ii) training of prospective entrepreneurs. PRIDE has 15,171 clients, with a volume of credit of GNF 5.339 billion. In order to focus PPJDE/Finance’s activities on its financial role, PRIDE/Formation has been created to dispense training independently.

The Agence Autonome d’Assistance intégrée aux Enterprises

58. 3AE was created in 1989 to provide microfinance to small businesses. With the support of the European Union and the United Nations Development Program / International Labor Office (UNDP / ILO) fund, it has concentrated its activities on women-based small business initiatives, and on projects intended for the reinsertion of the handicapped. 3AE does not collect deposits, and its source of equity is grants and donated funds. In 2002, 3AE was financing 132 small businesses, with total credits of GNF 1.2 billion. It is active in Conakry, and other urban centers throughout the country, and remains to date a small structure, with less than 50 employees.

C. Economic and Social Impact of Microfinance Institutions

As suggested earlier, the microfinance sector may be a key instrument in the fight against poverty, by providing financial services to the poor and small-scale enterprises, and allowing for a deepening of the financial sector. The potential demand for microfinance services is large, and applies as much to credit as to savings. Further, the impact of microfinance is not limited to financial services, as other issues addressed included gender equality, with the recognition of the role of women in savings and in the creation of small businesses, more equitable income distribution, and the promotion of participatory approaches at the collective level. In Guinea, the microfinance sector has clearly been identified in the Poverty Reduction Strategy Paper (PRSP) as key to poverty reduction. The PRSP has set a number of objectives regarding the microfinance sector, to be achieved by 2005. They include: doubling of the customer base, improving the saving rates, providing all regional development centers with at least one local savings and loan association. At end 2002, some progress may be observed, including a 40 percent increase in loans in 2002 only. Expanding the customer base and the degree of penetration of microfinance activities is an objective of microfinance policies. However, expanding microfinance services involves higher costs and risks, and impacts on the structure of the financial institutions involved, i.e., ownership, management, sources of funds, and legal structure, and on their operations, i.e. staffing, risk management systems, products, and distribution networks in order to ensure their financial sustainability. Previous experience in microfinance indicated that, while a major constraint for MFIs has been access to capital, in many cases, the major limit to sustainability has been the lack of institutional capability at the level of MFI local branches, which is examined in the next section.

Common Characteristics of MFIs

Microfinance institutions are characterized by the financial services they provide, the clientele they deal with, and the structure of their operations and balance sheets.

Legal structure of MFIs: Most MFIs are connected to NGOs, and are often incorporated as such, or as nonprofit organizations or other forms depending on the legal structure of their country of origin, e.g., credit unions, on savings cooperatives. In a number of countries, commercial banks have become large providers of microfinance services, though this requires strong local knowledge, and relatively high operation costs in decentralized areas. Other institutions with large existing infrastructures, such as state-owned banks, financial cooperatives, and even retail chains could play a significant role in reaching out to the poor.

Functions and services: The poor need a wide array of financial services, from vehicles for savings collection, to credit and various loan products. The importance of these two functions vary from country to country. While the credit allocation function dominated early models of microfinance, in some countries, MFIs act mostly as savings cooperatives. There is some evidence that this is often the case in Africa. As savings institutions, MFIs are useful in helping the poor to save and to establish some credit history and financial record. Additional financial services may include insurance, and payment transfer systems.

Clientele: Microfinance institutions are directed to poor people, including micro-entrepreneurs but also, and increasingly, individuals that face severe barriers to entry into the conventional financial system. Barriers to entry range from social constraints (distrust in the financial system, lack of savings habits, illiteracy), institutional constraints (weak enforcement of formal property rights, and contract terms), economic constraints (high costs of operations, high risk associated to lending, little negotiable assets from the part of the borrower), and geographic and social constraints (distance from urban centers, low levels of education).

Risk management: Because MFIs direct their activities towards a risky clientele, they have to develop appropriate solutions to risk management. Those include group lending, where a group of borrowers is collectively responsible for the repayment of loans of each of its member (this model was pioneered by Grameen Bank in Bangladesh in the mid-1970s), and dynamic incentives, where satisfactory repayment increases access to credit and gradually strengthens the incentive to repay loans.

Financial operations and profitability: Given the nature of the services performed by the MFIs and their clientele, MFIs usually operate with small balance sheets, loans and deposits of limited size, on average U.S.$50 or less for loans and U.S.$5 for deposits. MFIs usually operate at high costs and low revenues because of substantial overheads and fixed costs, due to the labor-intensive nature of micro-lending and to the high risk associated with their clientele, that may translate into a high share of delinquent loans. As a result, MFIs usually charge high interest rates to borrowers. However, many MFIs are not financially profitable and are dependent on the support of donors, which include domestic and foreign NGOS, governments, or foreign official donors. A challenge for MFIs is to reach sustainability in the medium- and long-term.

59. An important goal for MFIs is to reach, durably, a large segment of the population, in particular rural and poor households, small enterprises, and women, which are normally excluded from the credit market. The extensive assessment of the poverty profile in Guinea undertaken in the context of the PRSP identified zones with low degrees of urbanization, underdeveloped infrastructure, production and communications equipment, as the poorest of the country. In Guinea, rural population represents close to 70 percent of total population, and rural poverty accounts for 87.5 percent of national poverty, with nearly 18 percent of the rural population living in extreme poverty, revealing the importance of involving rural areas in any significant poverty reduction strategy. In income terms, about 40 percent of the population lives below poverty levels (estimated at about U.S.$300 per year per person). The incidence of poverty also varies by region, with poverty least prevalent in Conakry and most prevalent in Haute- and Moyenne-Guinée.

60. The impact of MFIs on economic development and poverty reduction is difficult to assess quantitatively, as no extensive impact analysis has been conducted yet.26 One proxy for the evaluation of the social impact of MFIs is to measure their penetration rate, or the extent to which microfinance institutions provide financial services throughout the country. To properly evaluate the economic and social impact of MFIs, measures of outreach (such as the penetration rate used in the section) would need to be considered jointly with indicators of financial sustainability and of poverty reduction, which are not yet available for Guinea. Table IV.2 provides a penetration indicator by estimating the number of families in the population (as a share of the total number of families) that use financial services provided by microfinance institutions. This share has more than doubled in the last five years, rising from 4.7 percent in 1997 to 9.6 percent in 2002. During the same period, the number of branches of the major MFIs rose by more than 60 percent, indicating the greater outreach of microfinance institutions today.

61. Guinea’s four major MFIs focus on different credit markets. Their complementarities allow for a broader penetration of microfinance services, with a potential significant impact on economic development and on poverty reduction. First, microfinance institutions provide short-term assistance to the very poor and to the most marginalized segment of the population. Two examples are the provision of credit to the rural poor in periods of draught or between two harvests, and the financing of business projects developed by the handicapped. Also, through “village-units”, microfinance institutions provide credit to remote rural areas, which is then allocated according to the various needs of the village’s inhabitants.

Second, MFIs finance micro-businesses and micro-projects, some having a special focus on women. The geographic coverage is broad, from small rural businesses to micro- and small businesses in urban centers. Finally, some institutions provide bigger loans (up to GNF 5 million, or about U.S.$2,500) in order to accompany successful businesses in their development, up to the point when they can rely on the conventional banking system.

62. MFIs in Guinea have developed largely outside of the realm of the formal financial sector. The limited systemic impact of the liquidation of the CMG resulted in part from the insulation of the microfinance sector. However, it has been recognized27 that the integration of microfinance institutions with the broader financial systems supports the development of the sector, by allowing for more access to capital, better protection of poor people’s savings, and increased professionalization of the sector. Further, in the specific case of Guinea, microfinance institutions provide a complement to the commercial banks, which focuses solely on the formal sector of the economy. In Guinea, the interaction between banks and microfinance institutions has increased in recent years. Most commonly, microfinance institutions are clients of commercial banks, which hold the deposits collected by microfinance institutions and provide cash management services. Some banks also provide, although such initiatives remain embryonic, extended financial facilities that offer more flexibility to MFIs’ operations, such as extended credit lines, and emergency credit lines to cover cash flow shortfalls. Avenues for cooperation are diverse, including the use of the specialized and extended retail network of microfinance institutions by conventional banks, to target large rural clients and to cooperate in credit collection. On some projects, the two kinds of financial institutions may cooperate, with banks focusing on the larger clients and MFIs providing credit to smaller entrepreneurs. This would be the case in industrial projects involving small-scale local entrepreneurs. While cooperation seems promising for both MFIs and banks, fundamental differences in objectives and management remain. Promoting and developing better linkages between MFIs and banks can only be based on commercially sustainable operations, and on a reliable partnership where the provision of accurate and regular data on operations is available. Also, greater integration between banks and MFIs would increase the systemic risk associated with potential failures of either type of institutions (see next section).

63. The risks associated with microfinance operations were exemplified by the failure of the largest microfinance institutions operating in Guinea, the CMG,28 prompting the government to liquidate the institution in 2001. The decision to liquidate the CMG came after a thorough operational and financial audit, conducted with the assistance of the World Bank and the Agence Française de Développement (AFD). The audit identified a severe liquidity risk, as liquid assets amounted only to GNF 0.3 billion. Also, given the significant losses it was incurring, the CMG was financing its current expenditures with drawing on the deposit base. The reasons for the failure of the CMG were clearly identified, including low quality of the loan portfolio, mismanagement, corruption and fraud, inadequate use of technical assistance, and the absence of a proper supervisory and regulatory environment. The government implemented an action plan for the liquidation of the CMG: closure of the microfinance network by March 2001, set up of a committee to supervise the liquidation operation, commissioning of an international audit company to assist the liquidator in the process, and full reimbursement of depositors. The liquidation of the CMG will be completed by mid-2003, and appears successful. General distrust in the financial system has been avoided, and most depositors shifted to other microfinance institutions, in particular towards the CRG. The reimbursement of depositors was financed partly by a grant from the AFD, and partly by the Guinean government.

D. Supervision of the Microfinance Sector: The Guinean Experience, Before and After the CMG

64. The importance of prudential supervision to ensure the soundness of financial institutions is generally accepted. Prudential regulation of the microfinance sector raises a number of specific issues, because of the peculiarities of the sector, including:

  • Protection of depositors. Depositors of MFIs may require more protection than traditional depositors, as they are relatively unsophisticated, more numerous and uncoordinated, facing MFIs that often operate as local monopolies. With undiversified portfolios, depositors are more fragile to losses from the failure of an MFI, and MFIs are often non profitable and prone to failure (see Box IV.1). The protection of public funds is also a concern. Prudential regulation is also needed to prevent that the failure of a MFI leads to a run on deposits, with possibly, systemic consequences for the financial system as a whole. The degree of protection may therefore be scaled depending on the sources of finance, as risks associated with outside finance, e.g., donors, are lower than those associated with domestic depositors. In cases where the State is a large shareholder in MFIs, failure would result in a direct cost to the invested public funds and prudential regulation may be needed in order to reduce de facto bail-outs.

  • Protection of borrowers. The risk facing borrowers is that monopolistic MFIs would charge too high interest rates at the expense of their clientele. International evidence suggests that, on average, MFIs operate at high costs and charge high real rates of interests to borrowers.

  • Protection of the financial system. Failure of an MFI may have spill-over effects to other financial institutions if the MFI had borrowed extensively from other institutions and/or if failure creates a fall in confidence with regards to the financial system as a whole. Panic, and bank-run may ensue. This would be particularly true of large MFIs, and of situations where people’s trust in financial institutions is yet to strengthen. The development of the MFI sector, and following, of a broad financial sector, may be impaired by fraudulent MFIs.

65. The benefits of prudential supervision have to be balanced against its costs. Supervision is costly, especially as MFIs are often small and numerous in terms of the size of their operations, with poor record keeping, and difficult to monitor, in countries where supervisory expertise is scarce. There is an evident trade-off in the allocation of supervisory resources between MFIs and financial institutions that may be more central to the stability of the overall financial system. Regulations are also costly to MFIs, and the costs are eventually passed on to the final customer. Finally, the social and economic benefits of MFIs come in part from the innovative solution they provide to overcome traditional barriers in the credit market. Regulation, such as imposing minimum collateral requirements, may limit the effectiveness of MFIs. A good example of this trade-off is the choice of minimum capital requirement. If set too low, it could lead to the proliferation of small MFIs and stretch supervisory capacity past its ability. If set too high, it could impair the development of the sector. The need for prudential regulation depends on the type of activities undertaken by the MFI (collecting deposits, lending, etc.), its level of development, and on its legal structure.

66. As suggested earlier, past experience has shown that sustainable microfinance is achieved through the strengthening of capacity at the level of retail microfinance branches, rather than increasing access to capital. Non-prudential regulation is therefore key, including the setting up of reliable management information systems, the development of appropriate management and staffing policies, the establishment of strong financial capabilities and internal controls, the maintenance of a high quality of loan portfolios, and enhancing the development of the sector.29 Furthermore, improvement in the quality of data, notably through the availability of transparent, harmonized, and detailed financial information, is a pre-requisite for effective prudential regulation. The cost associated with sustainability is often underestimated, in particular the unpopular measures they imply, i.e., charging higher interest rates to customers to cover the full cost of services, and developing very strict reporting and monitoring systems in order to maintain low delinquency rates.

Supervisory and regulatory issues in Guinea

67. In the specific context of Guinea, the main motivations for a strengthening of the regulatory and supervisory framework were to dampen the risk of moral hazard in the sector after the bail-out of the CMG, and to ensure that the bases for the stability of the sector are in place, in particular with regards to the competence of the actors in the sector and the monitoring of risk exposures. In November 2002, the central bank issued 10 instructions and is preparing a law to regulate the sector. To operate officially in Guinea, microfinance institutions and their managers need to be approved and licensed by a commission (the Commission d’agrément) presided by the Governor of the central bank. The Commission d’agrément aims at (i) ensuring the soundness of the institutions operating in the sector, (ii) offering institutional backing for the development of the sector, conducive notably to foreign assistance, (iii) providing a basis for supervision by the central bank. Supervision has also been reinforced in 2002. Off-site and on-site audits have been put in place. Under the new regulations, MFIs have to communicate every three month performance indicators, and standard financial statements, including income statements and balances. Regarding on-site audits, inspectors are guided by clearly defined procedures, detailed in a new Manuel des procédures.

68. The ten instructions issued by the central bank set a number of rules for the operation of microfinance institutions, including their administrative structures, prudential ratios, and penalties for noncompliance. The instructions specify eight requirements, which may vary with the type of microfinance institution:30 (i) minimum required capital (none for category I MFIs, GNF 400 million for category II MFIs, and GNF 200 millions for category III MFIs); (ii) minimum provisioning for nonperforming loans (from 25 percent to 100 percent depending on the length of non-payment); (iii) assets have to exceed liabilities by at least the amount of minimum capital as defined in (i); (iv) a ceiling on risks, or solvability ratio (not to exceed 10 percent of capital); (v) a ratio of liquid assets to short-term liabilities, or liquidity ratio, of at least 80 percent; (vi) a ceiling on the total amount of loans granted to a single individual (15 percent of capital for type I MFIs, and 25 percent for type II and III MFIs); (vii) a ceiling on total loans larger than 10 percent of capital (not to exceed eight times capital); and (viii) minimum reserves (20 percent of annual net benefits for type I MFIs and 15 percent for type II and III MFIs).

69. Guinea’s short experience under those new regulations is mixed. Three institutions have been licensed and two are in the process of receiving accreditation. For smaller and newer institutions, the central bank is working on allowing for a more flexible regulatory framework. One on-site audit has been conducted in early 2003. Off-site audits have been impaired by the continued scarcity of reliable information from MFIs. Since the new reporting requirements have been established, only one institution was able to comply. The other institutions experience difficulties, due to the dispersion of their activities throughout the country, the use of different accounting standards, and the high frequency at which they are required to report. This experience reveals some of the difficulties encountered in supervising the sector. The expertise in microfinance supervision is limited but the need to regulate the sector is urgent. The central bank is proceeding in a sort of “trial-and-error” fashion, with a temporary body of regulation before developing an exhaustive law covering the sector. Institutional capacity is weak at the level of the BCRG. Three central bank agents are in charge of the microfinance sector, which appears insufficient to develop a public policy for the sector, conduct off-site audits, and undertake extensive on-site audits. Microfinance institutions often lack themselves the institutional ability to produce timely financial and operational reports. The ability to produce transparent, detailed and harmonized data is crucial for effective monitoring, and the reinforcement of the institutional ability of Guinean MFIs is needed in the pursuit of the stability of the sector.

70. In spite of the difficulties outlined above, the microfinance sector in Guinea appears relatively sound and is improving. Even though the data on non-performing loans (NPL) should be interpreted with caution, given the divergence in the definitions used by MFIs before the new regulations were put in place,31 the data reported by the central bank shows that the proportion of non-performing loans in total credit by microfinance institutions has declined significantly, and is substantially below the proportion observed in the conventional banking sector, as shown in tables IV. 1. and IV.2. In view of the difficulties encountered by the CMG, the other MFIs engage into a drastic effort to reduce the proportion of non-performing loans in their portfolios. Microfinance institutions created their own mechanisms for dispute resolution and settlement - for example group lending and mutual collateral—and do not have to go through burdensome and sometimes ineffective judicial procedures, as banks do. Those results are achieved with microfinance institutions charging high interest rates, ranging from 15 to 36 percent in 2002, with an average of 26 percent. This average compares to an annual average treasury bill rate of 13.3 percent in 2002, 12.5 for sterilization bills.32 Combined with lower NPL rates than commercial banks, the high interest rates charged by MFIs should allow them to achieve sustainability. However, out of the four main MFIs, only one has reached operational sustainability at end-2002, while the others continue to rely on grants.

71. Finally, the role of the government with regard to MFI should not be limited to supervision and regulation. It is important notably that the government defines a policy to guide the development of the sector, and improve the overall business environment. As for other sectors of the economy, this would include a strengthening of the judicial system, an improvement in the level of education and in the quality of infrastructure in the country.

These general policies would contribute to a reduction in the costs and risks of microfinance activities, and, eventually, to their sustainability.

E. Conclusions and Recommendations: Assessment of the Prospects of the Microfinance Sector in Guinea

72. The discussion has identified the major challenges for the development of the microfinance sector in Guinea, namely, (i) a balanced and sustainable expansion of lending activities, matched by a similar expansion of deposits and/or access to other sources of finance, (ii) an adequate collaboration with the banking sector, (iii) a regulatory and supervisory framework that ensures the soundness of the sector while leaving enough room for innovation and expansion. Ensuring the sustainability of microfinance institutions is crucial for them to have a sustainable impact on the poor and on economic development.

73. The failure of the CMG has shown that, in the end, the relative success of microfinance institutions will depend not only on their ability to acquire a large deposit base, but also on their performance in managing cash flow and loan portfolios. Strengthening the prudential regulation is a step in the right direction, pushing microfinance institutions towards greater scrutiny and self-discipline. Based on available data, the four largest microfinance institutions operating in Guinea appear sound and well managed, with low proportion of non-performing loans, but institutional capacity needs to be significantly reinforced. The risk lies in the rapid expansion of microfinance activities, which needs to be carefully monitored to prevent a repeat of the CMG experience.

74. To conclude, the potential role of microfinance institutions in economic development and poverty reduction is significant, by providing access to credit to those excluded from traditional banking services and by fostering the development of new economic activities. Furthermore, they may act as a stepping stone for informal activities to eventually join the formal sector, with regular access to bank credit. While the PRSP process acknowledges the role of microfinance institutions, a clear public policy for the sector still needs to be adopted, of which the supervisory and regulatory framework is a key, but not sole, component.


  • CGAP, “Building Financial Systems that Work for the Poor”, CGAP Phase III (2003–2008) Strategy Paper, 2003 (January)

  • CGAP, “Consensus Microfinance Policy Guidance: Regulation and Supervision”, CGAP Position Paper, 2002 (September),

  • Hardy, D., Holden, P., and Prokopenko, V. (2002), “Microfinance Institutions and Public Policy”, IMF WP/02/159

  • Morduch, E. (1999), “The Microfinance Promise”, Journal of Economic Literature, Vol. 37 (December), pp. 1569614

  • UNDCF, “Building on lessons learned”, UNDCF Working Paper on Microfinance, 1999 (February)


Table 1.

Guinea: Selected Economic and Financial Indicators, 1998–2002

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Sources: Guinean authorities; and staff estimates and projections.

In percent of broad money stock at beginning of period.

Includes expenditure for restructuring.

Fixed capital formation.

Table 2.

Guinea: Gross Domestic Product at Current Prices by Demand Components, 1998–2002

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Sources: Guinean authorities; and staff estimates.
Table 3.

Guinea: Gross Domestic Product at Constant 1996 Prices by Sectors, 1998–2002

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Sources: Guinean authorities; and staff estimates.
Table 4.

Guinea: Consumer Price Index, 1998–2002

(Period average)

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Sources: Guinean authorities; and staff estimates.
Table 5.

Guinea: Consumer Price Index, 1998–2002

(End of period)

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Sources: Guinean authorities; and staff estimates.
Table 6.

Guinea: Financial Operations of the Central Government, 1998–2002

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Sources: Guinean authorities; and staff estimates.

Comprises the change in outstanding domestic arrears and the change in the float between expenditure commitments and cash payments for the current fiscal year.

Revenue minus noninterest expenditure, excluding foreign-financed investment projects, net lending and bank restructuring.

Table 7.

Guinea: Central Government Revenue, 1998–2002

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Sources: Guinean authorities; and staff estimates.

The VAT, introduced in August 1996, replaced the turnover tax. Includes the VAT (the turnover tax before 1996) on imports.

Including recovery of arrears.

Table 8.

Guinea: Central Government Expenditure, 1998–2002

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Sources: Guinean authorities; and staff estimates.
Table 9.

Guinea: Monetary Survey, 1998–2002

(In billions of Guinean francs, unless otherwise indicated)

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Source: Central Bank of the Republic of Guinea (BCRG).