An inclusive economy requires an inclusive financial system. But in South Sudan a focus on financial inclusion, for the time being, might be undesirable.
An inclusive financial system is one that serves all clients, not just the relatively well-off. This means reaching out to poor and low-income clients and providing them with affordable financial services tailored to their needs. Inclusive finance requires a diverse range of financial products such as loans, savings and insurance, and clear, transparent and understandable information on terms and conditions. It also requires outreach, so that products are not only available to urban populations.
The question is whether financial inclusion should be a priority in all settings. In South Sudan a focus on financial inclusion, for the time being, might be undesirable. A post-conflict country like South Sudan lacks clear regulations and a functional legal system, and has a challenging macroeconomic environment. Decades of civil war have forced people to move away from high exposure places. The population is now sparsely spread over a vast country without infrastructure. As a result, 80% of the population is involved in subsistence farming and markets are underdeveloped. Business activity, limited to a number of larger towns and without any local industry, is driven by imports from neighbouring countries.
In South Sudan, two departments of Cordaid (Investments and Entrepreneurship) focus on inclusive finance as a way of integrating low income people into economic transformation. Poor infrastructure, weak human resource capacities and a lack of appropriate business development services make the costs of doing business extremely high, also for financial institutions. This makes it impossible for them to serve all the states of South Sudan.
Due to the limited number of successful local entrepreneurs – most businesses are in foreign hands – and limited possibilities to enforce contracts, lending activities are not a very attractive course of business. For a flourishing, inclusive financial sector, three things are indispensable: security, economic activity and population stability. South Sudan lacks all of these.
How can we, against the background of these problems, contribute to a flourishing, inclusive financial sector in such an environment? The priority should be to work with financial institutions to ensure that productive financial products are made available to the economically active in a sustainable way. Cordaid has therefore chosen to support two microfinance institutions that currently operate in the country’s economically most active states: Finance South Sudan Ltd (FSSL) and the Rural Finance Initiative (RUFI) in South Sudan.
Microfinance in post conflict countries is no different from elsewhere in that microfinance institutions should always make their products appropriate to their clients’ needs, be vigilant regarding defaults and work as efficiently as possible to keep costs low. The challenges in South Sudan forced FSSL to be somewhat less inclusive than it had wished to be and to make extra efforts to make the institution sustainable. For example, FSSL had to close northern branches in the cities of Wau and Malakal, which were suffering most from the economic downturn due to the oil conflict between South Sudan and Sudan and the closure of the borders. Costs of loan losses and close monitoring of the branches became too high, severely putting the sustainability of the entire institution at risk.
In the South Sudanese states of Central and Eastern Equatoria Cordaid now reaches micro and small entrepreneurs with financial products that help them to start or grow their businesses. Saving products are currently being developed. To ensure that the company keeps track of its borrowers in a country with limited formal registration or means of identification, FSSL has implemented a biometric system with fingerprint identification. Since cable internet is not available, satellite-based internet connectivity of the branches facilitates the functioning of the loan tracking and management information systems. In addition, Cordaid has supported FSSL with the investment in this system by providing grants for staff training, team building and motivational activities, and for proper branch offices with clear logos, office uniforms and permanent contracts for staff, to show that FSSL is a permanent institution. Cordaid will cooperate with local and national governments, NGOs, international institutions and the private sector to find solutions to improve the outreach of financial services.
Cordaid’s aim to reach all people in need of appropriate and affordable financial products is a goal which cannot be achieved in just a few years. But we are committed to continue working with these two South Sudanese MFIs to ensure that they become self-sustainable institutions. For an investor, this requires both a long-term vision and the ability to accept losses.