UNCLAS SECTION 01 OF 02 COTONOU 000196

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR AF/W (DBANKS)
PARIS FOR D'ELIA

E.O. 12958: N/A
TAGS: PGOV PREL KCOR KMCA BN
SUBJECT: BENIN: CRISIS IN MICROCREDIT SECTOR


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1. (U) SUMMARY: The Government of Benin (GOB) dismissed the Director
General of PADME, a microcredit institution, for mismanagement
disclosed by a report from the Financial Audit Office (IGF). The
Director General (DG) and the employees of PADME denied all
allegations of mismanagement and malfeasance and accused the
government of attempting to take over PADME. When the GOB refused to
back down, PADME personnel went on strike countrywide to protest the
dismissal. The situation risks destabilizing the microcredit sector
in Benin. END SUMMARY


2. (U) On March 5, 2008, the Council of Ministers examined the IGF
audit findings of PADME. The IGF'S report highlighted the following
improprieties: mismanagement of the credit portfolio by 39 PADME
employees through fictitious loans resulting in a loss of over CFA
1,000,000,000 (about $2.2 million); excessive and undocumented
travels of the DG (over 170 days in 2005; 151 days in 2006 and 57
days from January-July 31, 2007); the payment of an unduly high
salary to the DG; and the failure to appoint a deputy to the DG or a
Technical Director. The report stated that the DG failed to
supervise adequately because of his extended absences.


3. (U). As a result, the Council of Ministers instructed the
Minister of Microfinance and Promotion of Youth and Women to dismiss
the DG, to dismiss and replace the members of PADME's Board of
Directors and to take disciplinary action against the accused. The
Council of Ministers also urged the treasury to recover the funds
embezzled through fictitious loans and to seek reimbursement for the
travel allowances paid to the DG. The government called on the
Ministry of Justice to take legal action against the individuals
involved in the case. On March 18, the Minister of Microfinance and
Promotion of Youth and Women named her technical advisor as Acting
DG of PADME and installed him officially on March 31.


4. (U) The PADME DG strongly denied all of the IGF allegations. He
linked the GOB's reaction to a research paper that he published on
the microcredit sector in Benin, which was not favorable to
Pre

sident Yayi's low interest microcredit program to assist the most
poor. The ousted DG claims the government is taking revenge. His
lawyer referred to a wide range of ministerial decrees and to the
charter of PADME to conclude that the GOB's dismissal of the DG has
no legal basis. The DG has challenged the government decision before
the Supreme Court. In support of their Director, PADME employees are
on strike. Attempts by the GOB to engage PADME employees in dialogue
have failed. On March 26, PADME clients staged a protest march
through Cotonou. PADME has about 100,000 clients, mostly small
traders who can no longer make the required regular payments on
PADME loans or renew loans. Every day that PADME branch offices
remain closed due to the strike raises public displeasure and the
level of inconvenience to the clients.


5. (U) PADME is a non-profit organization created in 1993 by the GOB
with World Bank financing and consultants from VITA, a U.S. NGO, to
off-set the fall-out of structural adjustment. It allowed civil
servants to leave the public sector and start private enterprises,
in the interest of slimming down a bloated state apparatus. In
December 1997, on completion of this project, the PADME was turned
into an association with the GOB transferring to it an asset
amounting to CFA 2,000,000,000 (about $4.4 million). According to
the Minister of Microfinance, since its creation the government has
injected into PADME a total sum of CFA 6,000,000,000 (about $13.216
million)


6. (U) In 1994, the Assembly of the West Africa Monetary Union
(UMOA) member states adopted the PARMEC law (Projet d'appui a la
Reglementation sur les Mutuelles d'Epargne et de Credit) to regulate
mutual or cooperative institutions, including microfinance
institutions in the UMOA. Articles 66 and 67 of the PARMEC law,
stipulate that Ministries of Finance have primary responsibility for
external control and supervision of microfinance institutions and
allow member governments to delegate this authority to the Central
Bank. Under the framework of the PARMEC law, special provisions
known as Tailored Agreements (or Convention Cadre) were introduced
in 1997 in UMOA to facilitate registration and supervision of
microfinance institutions at the country levels. Consequently,
member states had an obligation to adopt this law in their
respective countries and to issue decrees for application. The GOB
signed Agreement No. 1652 with PADME in 2005, which authorizes the
Ministry of Finance to supervise PADME's activities and to take
sanctions against employees involved in malfeasance and
mismanagement.


7. (U) Pending the verdict of the Supreme Court, PADME's lawyer
acknowledged the existence of the aforementioned legal instruments
governing the microfinance sector in Benin. However, he maintained
that the dismissal of the PADME DG was illegal. On the other hand,
the Minister of Microfinance based the legality of her dismissal of
the DG on the following points: GOB oversight responsibility for

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official funds invested in PADME's operations and applicability of
Agreement No. 1652 between PADME and the GOB.


8. (U) Until recently, PADME was known as the best microfinance
institution in Benin and one of the best in Africa in terms of the
quality of the services and outstanding performance. The Director
General of PADME, unanimously hailed for his professionalism and
competence, was invited frequently to attend conferences worldwide
on microcredit issues. According to a well-informed source, PADME
was in the last stages of transforming from an association into a
for-profit enterprise with local and international investors when
the GOB issued its report.


7. (SBU) COMMENT: The current situation does not augur well for
peace and stability in the already tense environment leading up to
local elections now set for April 20. The crisis undermines
President Yayi's popularity given the number of people who benefit
from and depend on PADME. On one hand, a Supreme Court ruling in
favor of the GOB would be a welcome boost for President Yayi's
anti-corruption efforts. On the other, the courts would have to
establish the DG's culpability in order to dispel doubts surrounding
the case and to reinforce the government's credibility. Until these
doubts are dispelled, PADME will be essentially moribund and
discredited; existing loan holders will have little incentive to
repay their loans; and foreign investment in the sector will be
stymied. Also, MCC's Access to Financial Services project, which
aims to strengthen government oversight of the microfinance sector,
may be potentially impacted by the case. It will be crucial to
prove that current GOB oversight of the sector is correct and not
unduly influenced for political ends. END COMMENT.

BROWN