In recent years, Lesotho has made remarkable strides in financial inclusion, with 87% of its population having access to formal financial services in 2021. This commendable achievement positions the country among the most financially inclusive in the region. Surpassing the 85% target set in its 2017-2021 National Financial Inclusion Strategy, Lesotho is steadily progressing towards its objective of financial inclusion for all. With these sustained efforts, the future looks promising.
Despite the relatively low access to traditional banking services at 39%, with only a minimal increase over the past decade, the remaining 48% of the population relies on formal non-bank financial service providers. These providers offer microfinance services to underserved individuals and micro, small and medium enterprises (MSMEs) who are typically excluded from traditional banking systems. Microfinance is vital in expanding access to credit, savings and insurance, empowering underserved communities by providing financial products tailored to their needs, with flexible repayment systems and a local presence in communities for accessibility. These diverse finance offerings underpin larger social issues to foster development at all levels of society by addressing exclusion and inequality in the long term, as various studies have explored. Microfinance promotes financial inclusion, highlighting its crucial role in increasing access to financial services and promoting economic progress in countries like Lesotho.
Figure 1: Overview of financial inclusion landscape in Lesotho 2021
Source: FinScope Lesotho 2021. Available FinScope Lesotho 2021.
Microfinance services provide Basotho individuals and families with the means to save money, start small businesses, and achieve financial security. Although challenges for underserved communities persist, the positive impact of microfinance is evident, especially through pioneering microfinance service providers like Boliba Savings and Credit, the oldest financial cooperative in Lesotho. Boliba primarily serves clients overlooked by mainstream banks due to factors like low or unstable income, limited collateral, or lack of formal credit history. By providing savings and credit products to its members both in the public and private sectors, Boliba promotes greater economic inclusion.
For young Basotho adults like Karabo Kekana, microfinance helped create a sustainable livelihood. In an interview, Karabo shared, “Because of the microloan I received, I was able to achieve my dream of becoming a piggery farmer.”
Despite facing financial resource constraints and limited access to capital, he was able to overcome these obstacles by securing a microloan from a reputable microfinance institution (MFI) operating in Southern Africa. This financial support enabled him to purchase equipment and supplies to start his business. Thanks to this investment, he has significantly improved not only his livelihood but also the lives of his family members. His success is a testament to the transformational power of microfinance and an inspiring example of what young individuals can achieve with access to the right financial tools.
MFIs have been consistently expanding their credit offerings, focusing on short-term loans that can be paid off within a year. The review period recorded an impressive increase of 8.5% in total loans, amounting to M1,1 billion. Despite this shift towards short-term loans, MFIs continue to play a crucial role in the economy, providing access to credit and other financial services to underserved populations. Through their support of small businesses, these institutions have a significant positive impact on the broader economy.
Figure 3: MFIs Performance Indicators (in millions of Maloti)
Source: Adapted from Central Bank of Lesotho Financial Stability Report 2022.
Further, the synergy between mobile money service providers (MMSPs) and MFIs also plays a valuable role in promoting financial inclusivity in Lesotho. MMSPs often collaborate with MFIs to extend financial services to underserved populations through the use of mobile network coverage and technology infrastructure to reach clients more efficiently, even in remote areas. MMSPs offer a range of digital financial services, such as savings, loans, and insurance, complementing the services that traditional MFIs offer and serving as a convenient channel for their mutual clients. Notably, in 2021, mobile money usage in Lesotho was high, with two in three (66%) Basotho using mobile money, and 62% of them saving via these platforms. In 2022, money in circulation within mobile money services was reported to be M532.9 million (Financial Stability Report, 2022).
Figure 2: Mobile money drivers (2021)
Source: FinScope Lesotho 2021. Available FinScope Lesotho 2021.
Addressing the challenges and risks that microfinance service providers face
Although microfinance service providers have a beneficial role in society, it is important to recognise that challenges persist. One of the most significant challenges that MFIs face is the lack of access to sufficient capital, which limits their ability to expand their operations. This issue has become more pronounced due to the Covid-19 pandemic. Additionally, over-lending is another issue that limits their reach to a wider audience and can create cash flow issues.
On the other hand, MFI customers face the challenge of some MFIs withholding their identity documents as collateral. This lack of customer protection is still a cause of concern.
It is crucial to ensure that microfinance products meet the needs of customers and that providers have adequate training and support to take full advantage of the opportunities available. Finally, ethical and transparent operations must be employed with a strong focus on responsible lending practices. It is essential to recognise the potential of over-indebtedness and take steps to mitigate this risk.
The challenges presented here can be addressed in several ways. One way is to improve financial literacy through education and training programmes for service providers and consumers. Another is to effectively regulate microfinance service providers to ensure they are not charging excessive interest rates and to govern ethical practices. Ensuring that providers are sustainable, ethical, and designed to meet their customers' needs is imperative.
The Lesotho government implemented the 2017-2021 National Financial Inclusion Strategy and is currently developing a new strategy with the assistance of the EU-funded SIBE project. These strategies aim to enhance access to financial services. Although progress has been made, there is still a need for improved communication and collaboration among government agencies and stakeholders to effectively implement the strategy.
Microfinance services play a vital role in promoting economic development in Lesotho, with notable strides made through initiatives such as the Financial Sector Development Strategy by the Central Bank of Lesotho, the first Financial Inclusion Project supported by the United Nations Development Program (UNDP) and United Nations Capital Development Fund (UNCDF), and the Making Access Possible (MAP) programme supported by UNCDF and FinMark Trust and others. These initiatives have significantly increased financial inclusion in Lesotho, demonstrating how advanced business practices and strategies can yield positive outcomes in the microfinance sector. The goal of these programmes is to expand inclusivity and enhance the economic well-being of Basotho. Through microfinance, Lesotho is making unprecedented progress towards achieving greater financial inclusion, and the positive effects of these efforts are already being experienced.