Mi­cro­fi­nance: Good for the poor?

To lift the poor from poverty, cre­ate jobs, not loans, crit­ics say

Africa Renewal - - INTERVIEW - By John Nji­raini

In 2005 the United Na­tions de­clared the year the In­ter­na­tional Year of Mi­cro­cre­dit. At a time when the clam­our for fi­nan­cial in­clu­sion was gain­ing mo­men­tum, the dec­la­ra­tion brought mi­cro­fi­nance from the pe­riph­ery of fi­nance and of­fered an es­ti­mated 2.5 bil­lion peo­ple an op­por­tu­nity to “grow thriv­ing busi­nesses and, in turn, pro­vide for their fam­i­lies, lead­ing to strong and flour­ish­ing lo­cal economies.”

At that time it was widely be­lieved that re­duc­ing ex­treme poverty would be nearly im­pos­si­ble if the ma­jor­ity of the poor could not save or have ac­cess to credit. Small lenders were hardly en­ter­ing into the main­stream fi­nan­cial sec­tor. Their loans were re­stricted to un­der $200 at high in­ter­est. The rigid­ity of com­mer­cial banks meant that mi­cro­fi­nance in­sti­tu­tions (MFIs) of­fered the only hope for fi­nan­cial in­clu­sion to the world’s poor. Then UN Sec­re­tary-Gen­eral Kofi An­nan ac­knowl­edged as much when he de­clared that mi­cro­fi­nance could be a “weapon against poverty and hunger.”

A decade later the world has an op­por­tu­nity to eval­u­ate whether mi­cro­cre­dit re­ally “changes peo­ples’ lives for the bet­ter,” as Mr. An­nan as­serted. In July of this year, the UN will hold the Third In­ter­na­tional Con­fer­ence on Fi­nanc­ing for De­vel­op­ment, in Ad­dis Ababa, Ethiopia. While the con­fer­ence will dis­cuss the whole spec­trum of ef­fec­tive and ef­fi­cient mech­a­nisms of mo­bi­liz­ing re­sources for de­vel­op­ment, mi­cro­fi­nance is likely to be one of the key top­ics.

The tim­ing is crit­i­cal be­cause the con­tri­bu­tion of mi­cro­cre­dit in achiev­ing the Mil­len­nium De­vel­op­ment Goals, a set of global bench­marks for UN Mem­ber States that is set to ex­pire in 2015, has been min­i­mal. The MDGs will be re­placed by the pro­posed Sus­tain­able De­vel­op­ment Goals (SDGs), to be en­dorsed at the Septem­ber 2015 sum­mit of world lead­ers at UN Head­quar­ters.

Ar­guably, the mi­cro­fi­nance move­ment is vi­tal to the de­vel­op­ment agenda. The suc­cess of the move­ment in a coun­try like Bangladesh, where there are a stag­ger­ing 20 mil­lion mi­cro-bor­row­ers, has shown that mi­cro­fi­nance can lift mil­lions out of ab­ject poverty.

China, which over a sin­gle gen­er­a­tion has be­come the world’s sec­ond big­gest econ­omy, has also proven that mi­cro­fi­nance can help en­ter­prises flour­ish. Un­til 2005, China did not al­low MFIs. A decade ear­lier the gov­ern­ment had started ex­per­i­ment­ing with mi­cro­fi­nance as

$5 Tn was the to­tal as­sets of sov­er­eign funds across the globe by the end of 2013

a tool in poverty re­duc­tion, and in 2005 it al­lowed the commercialisation of mi­cro­fi­nance. This opened the flood­gates for re­sources that help tackle poverty and spur the growth of en­ter­prises in ru­ral ar­eas, where the ma­jor­ity of the coun­try’s 400 mil­lion peo­ple who live on less than $2 per day are con­cen­trated. Since the ap­proval of mi­cro­cre­dit, the in­dus­try has grown ex­po­nen­tially.

In sub-Sa­ha­ran Africa, gov­ern­ments now ap­pre­ci­ate the im­pact of mi­cro­fi­nance and have en­acted favourable laws, en­cour­aged in­vest­ments, opened up the in­dus­try to for­eign cap­i­tal and im­proved polic­ing mech­a­nisms to pro­tect cus­tomers. The growth of the in­dus­try is a tes­ta­ment to the high de­mand for mi­cro­cre­dit.

“Mi­cro­cre­dit is an ef­fec­tive cat­a­lyst in al­le­vi­at­ing poverty in Africa. Peo­ple need ac­cess to cap­i­tal to grow their in­for­mal and for­mal busi­nesses that of­fer them a reg­u­lar in­come and en­able them to lead de­cent lives,” says Mads Kjaer, chief ex­ec­u­tive of MYC4, a Den­mark-based online plat­form that helps in­di­vid­u­als to loan money to small en­ter­prises in subSa­ha­ran Africa. The av­er­age loan is about $150 per month.

The growth of mi­cro­fi­nance in Africa since 2000 has been in­spir­ing. Data by Mi­cro­fi­nance In­for­ma­tion Ex­change, a non-profit or­gan­i­sa­tion that keeps track of the in­dus­try, shows that from 2002 to 2012 the in­dus­try ex­panded by more than 1,300%. Dur­ing this pe­riod, gross loan port­fo­lio leapfrogged from $600 mil­lion to $8.4 bil­lion. The num­ber of mi­cro­fi­nance cus­tomers or de­pos­i­tors shot from 3 mil­lion to 20 mil­lion, with ac­tive bor­row­ers in­creas­ing from 3 mil­lion to 7 mil­lion.

In coun­tries like Benin, Rwanda, Sene­gal and Tan­za­nia, mi­cro­fi­nance has be­come a life­line for low-in­come earn­ers, who are largely in in­for­mal sec­tors. In Benin, where a third of the pop­u­la­tion lives on less than $1.25 a day, peas­ant farm­ers, food pro­ces­sors and small-scale traders de­pend en­tirely on mi­cro­cre­dit for sur­vival. This has even forced the gov­ern­ment to join the sec­tor by set­ting up the Na­tional Mi­cro­fi­nance Fund, which is de­signed specif­i­cally to tackle poverty in ru­ral ar­eas by ex­tend­ing small loans. In Rwanda the growth of the mi­cro­fi­nance sec­tor is out­pac­ing that of the of­fi­cial bank­ing sec­tor.

“Mi­cro­fi­nance does not get the credit it de­serves, yet it is the life­line for the peo­ple at the bot­tom of the pyra­mid,” says James Mugambi, the man­ag­ing di­rec­tor of Premier Kenya, a mi­cro-len­der with cus­tomers across East Africa.

De­spite the im­pres­sive growth of mi­cro­fi­nance in Africa, its im­pact in al­le­vi­at­ing poverty re­mains rel­a­tively mar­ginal, some crit­ics say. The in­dus­try still serves a small frac­tion of the pop­u­la­tion and of­fers loans that are ex­pen­sive and short-term. Its im­pact has thus largely been on ba­sic house­hold units, where small loans of­fer fam­i­lies op­por­tu­ni­ties to earn reg­u­lar in­come through small en­ter­prises, pay ex­penses like school fees, in­vest in live­stock or buy so­lar light­ing, among other things.

“Mi­cro­cre­dit is not an ef­fec­tive way to re­duce poverty,” ob­serves Aneel Kar­nani of the Ross School of Busi­ness at Michigan Univer­sity in the US. “The best way to re­duce poverty is to cre­ate sig­nif­i­cant job op­por­tu­ni­ties suited for the poor. The best en­gine for do­ing that is small and mid-size en­ter­prises, not mi­cro-en­ter­prises.”

Ad­dis con­fer­ence

The Third In­ter­na­tional Con­fer­ence on Fi­nanc­ing for De­vel­op­ment will thus be faced with the un­prece­dented chal­lenge of un­lock­ing the stunted po­ten­tial of mi­cro­fi­nance to guar­an­tee sus­tain­able im­pact. No­tably, it comes at a time when the mi­cro­fi­nance in­dus­try is at a cross­roads. To­day mi­cro­fi­nance risks be­ing an­ni­hi­lated in many sub-Sa­ha­ran African coun­tries as com­mer­cial banks ad­just their busi­ness mod­els to ac­com­mo­date small savers and bor­row­ers. But prob­a­bly the big­gest threat to MFIs is from telecom­mu­ni­ca­tion com­pa­nies, which are tar­get­ing mi­cro-lenders’ clients with mo­bile bank­ing.

A new World Bank re­port says mo­bile bank­ing has be­come the panacea in Kenya for fi­nan­cial in­clu­sion. The Mea­sur­ing Fi­nan­cial In­clu­sion around the World re­port shows that a stag­ger­ing 75% of the Kenyan pop­u­la­tion is banked, the ma­jor­ity through mo­bile phones. Mo­bile bank­ing is now be­ing hailed as more vi­able than mi­cro­fi­nance. “Mo­bile bank­ing will help the poor trans­form their lives,” said Bill Gates, one of the world’s rich­est men, re­fer­ring to M-Pesa, a mo­bile bank­ing prod­uct in Kenya.

Ac­cord­ing to Mr. Kjaer of MYC4, the Ad­dis Ababa con­fer­ence must ex­plore the bot­tle­necks that have hin­dered mi­cro­fi­nance from re­al­is­ing its full po­ten­tial in poverty alle­vi­a­tion. “Mi­cro­fi­nance is a tool that Africa can­not do with­out,” he says. “What we need are new and in­no­va­tive ways and busi­ness mod­els to make it more at­trac­tive.”

One po­ten­tial way for mi­cro­fi­nance to sal­vage its fad­ing al­lure is by cap­i­tal­iza­tion. In its cur­rent setup, the ma­jor­ity of MFIs in Africa are highly un­der­cap­i­tal­ized. Many are op­er­at­ing just above the thresh­old de­manded by reg­u­la­tors. As a re­sult of un­der­cap­i­tal­iza­tion, MFIs are forced to spread risk by of­fer­ing only small loans to many peo­ple at ab­surd in­ter­est rates.

Di­rect­ing cap­i­tal into mi­cro­fi­nance to en­able lenders to pro­vide big­ger loans at lower rates and with long ma­tu­rity times would make it eas­ier for the in­dus­try to con­trib­ute ef­fec­tively in re­duc­ing poverty. While the nat­u­ral sources of cap­i­tal are donors and pri­vate in­vestors, the in­dus­try can also tap into cheap cap­i­tal be­ing held by sov­er­eign wealth funds and pen­sion funds. By the end of 2013, the to­tal as­sets of sov­er­eign funds stood at $5 tril­lion across the globe.

“There are re­sources that can be made avail­able to MFIs, but there is need for proper polic­ing,” notes Mr. Kjaer.

Another po­ten­tial strat­egy is to change the pri­mary goal of mi­cro­cre­dit. Tra­di­tion­ally mi­cro­fi­nance is per­ceived as a quick-stop shop for emer­gency do­mes­tic loans. A more sus­tain­able ap­proach would be to change the in­dus­try’s mind-set so that it be­comes a source of funds for en­ter­prises that have the po­ten­tial to ex­pand and em­ploy more peo­ple.

Push­ing mi­cro­cre­dit as a de­vel­op­ment tool to an in­creas­ingly scep­ti­cal world dur­ing the Ad­dis meet­ing may be a hard sell. How­ever, fail­ing to con­vince stake­hold­ers of the need for mi­cro­fi­nance in poverty alle­vi­a­tion could be sui­ci­dal for the in­dus­try. It is im­per­a­tive to note that the growth of mi­cro­fi­nance over the past decade has been pro­pelled largely by good­will, mainly from de­vel­op­ment part­ners and the Nor­we­gian No­bel Com­mit­tee, which awarded the 2006 No­bel Peace Prize to Muham­mad Yunus and Grameen Bank for giv­ing loans to en­trepreneurs too poor to qual­ify for tra­di­tional bank loans.

Alamy/David Dorey

A Mi­croEn­sure agent talks to mi­cro­fi­nance clients about mi­croin­sur­ance at a group meet­ing in Nairobi, Kenya.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.