Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services.
More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers." Those who promote microfinance generally believe that such access will help poor people out of poverty.
Several factors have led to increased interest in microcredit in promoting growth with greater equity. There has been a growth in the recognition of the importance of empowering all people by increasing their access to all the factors of production, including credit. In addition, the value of the role of non-governmental organizations in development is receiving more attention.
It is in that context that microcredit has recently assumed a certain degree of prominence. It is based on the recognition that the latent capacity of the poor for entrepreneurship would be encouraged with the availability of small-scale loans and would introduce them to the small-enterprise sector. This could allow them to be more self-reliant, create employment opportunities, and, not least, engage women in economically productive activities. Currently, there are estimated to be about 3,000 microfinance institutions in developing countries. These institution also help create deeper and more widespread financial markets in those countries.
Informal and small-scale lending arrangements have long existed in many parts of the world, especially in the rural areas, and they still survive. Good examples are schemes in Ghana, Kenya, Malawi and Nigeria ("merry-go-rounds", "esusus" etc.). They provide the rural population with access to savings within the local area and with a certain cushion against economic fluctuations, and they encourage a cooperative and community feeling. The groups formed provide joint collateral and serve as instruments for spreading valuable information that is useful for economic and social progress.
These schemes are characterized by relatively small loans, a few hundred dollars at most. The repayment period is relatively short, about a year or so. Women are a major beneficiary of their activities, and the destination of the funds primarily includes agriculture, distribution, trading, small craft and processing industries. The administrative structure is generally light and the entire process is participatory in nature. The impact of microcredit lending varies widely between rural areas and urban areas.
In many developing countries, overall interest rates are relatively high to begin with, so that rates charged by micro lending schemes are quite high when the risk premium is added. Many of these micro-institutions claim a high rate of repayment. This is attributable to the informal participatory structures, which create an atmosphere in which debtors respect their obligations.
Over the past decade, microfinance institutions have adopted innovative ways of providing credit and savings services to the entrepreneurial poor. Two approaches have been advocated on the role of credit in poverty reduction. While supporters of the income-generation approach maintain that credit should be provided mainly to the entrepreneurial poor to enable them to finance specific private income-generating activities to increase their revenues, proponents of the so-called new minimalist approach argue that credit progammes would still be helping the poor fight poverty by giving credit to any poor person who is able to repay a loan without dictating to that person how and on what the loan should be used. Some studies have pointed out that the problem of the non-productive use of credit, as advocated by the minimalist approach, lies in the fact that by consuming rather than investing their loans, the actions of such borrowers, if imitated by other poor people, could produce a negative impact on the future growth of microcredit.
In Africa group organizing has proven itself an effective strategy for MFI sustainability that Africans are especially
predisposed. Group formation for individual and community goals is a pre-existing,"homogeneous" mode of organization in Africa that already operates in traditional financial schemes and is readily adaptable to new microfinance initiatives. The group has proven especially effective in the rural setting, where 80% of Africa's population reside. The relative isolation, small size, and common resources of villages engenders a mentality and
approach to problems that are seen as mutual rather than individual.
In Africa, women are a better credit-risk than men and more responsible managers of meager resources. Furthermore, they are more committed to using their loans for the benefit of their household rather than self-gratifying
consumption (as common among men). The most compelling reason for MFIs to prioritize women is to assist the poorest, who are disproportionately women.
The Group of Common Initiative of the Women Farmers of Bogso (GICPAB) utilizestraditional group practices to empower members and enhance the village community. Referred to as the Yum, this group methodology initially focused on improving cassava production,processing, transportation, and marketing, enabling members to work together to save time,reduce costs, and to share resources, infrastructure, and knowledge. Gradually, the Yum scaled up to other activities, including school and library construction, establishing a village market,and operating a school canteen. The Yum now extends into microfinance initiatives, including a credit line for GICPAB members with a child or grandchild registered at the local school to obtain a loan for school fees, books, meals, and other needs to ensure that within three years all village children will attend primary school. A credit line has also been provided for primary health care. The success of these microfinance programs rests in the traditional group practices embodied in the Yum, which uses the local proverb, “You can’t wrap a gift box with just one hand.”
Microfinance and microenterprise are critically linked; microenterprise development is an essential extension of microfinance schemes. If microfinance is to have a sustainable impact on poverty eradication, it must eventually scale-up into creating a private sector of entrepreneurs who function in the formal economy. In other words, microfinance has the potential of formalizing the informal sector, empowering micro-entrepreneurs to participate and benefit from the formal economy.Microfinance can support initiative for direct supply and market linkages to small and
medium businesses targeting promising micro-entrepreneurs in non-traditional, low volume but high value-added products in potential niche growth areas of the economy. Such an approach could reach existing micro-entrepreneurs who are seeking to graduate from the survivalist profile of microenterprises into a more secure and productive foothold of the formal sector of the economy. It would expose microenterprises to larger enterprises "higher up the chain", encouraging forward and backward linkages with established companies. Targeted microentrepreneurs
can potentially develop, produce, and perhaps market low-volume but higher profit products, expand, and take on additional employees, thus scaling-up.
This potential, however, is contingent upon a supportive environment at all level and among all actors, supporting business incubation and expansion. For example, at the local level, regulation and standards among MFIs and their respective microenterprises can lend legitimacy to these initiatives, while networking among MFIs can provide a lobby platform to propel enterprises stemming from microfinance into the formal economy. MFIs can work together to ensure that Governments and donors do not support organizations that undermine the market for microfinance services and microenterprises by subsidizing loans.
In many cases, an effective infrastructure for microfinance exists within public agencies, such as the postal system.
Postal Savings Banks offer an important comparative advantage in geographical coverage for both rural and urban outreach.
Promote Networking and Cooperation: National and international actors should reinforce cooperation and coordination among actors at all levels in the design, management, and assessment of microfinance initiatives. Mechanisms should be created for the exchange of knowledge and experience among African microfinance practitioners, including the use of the Internet, dissemination of written material, field level practitioner exchanges, and best practice workshops. Regional coordinating committees and sub-regional conferences can bring together microfinance policy makers, leaders, and representatives from bilateral, multilateral and intergovernmental development partners to access and compare microfinance progress. Coordination among various microfinance actors also ensures complimentary rather than competing policies.
Sources: United Nations Capital Development Fund, Microfinance and Anti-Poverty Strategies
Marguerite Robinson. The Microfinance Revolution: Sustainable Finance for the Poor World Bank, Washington, 2001
United Nations Department of Economic Affairs and United Nations Capital Development Fund. Building Inclusive Financial Sectors for Development. United Nations, New York, 2006.
Compiled by Nyambura Mundia
