On November 2015, the Daily Monitor published an article by Edgar Mwine titled “Giving micro-loans to the poor doesn’t even up society or end unemployment”. In the article, Mwine argues that despite the extension of micro-loans, the quality of lives of people living below the poverty line on the continent has not improved, and the gap between the wealthy and the poor is widening tremendously. He says borrowers use the funds to start small businesses, which encounter a lack of consumer demand – after all, their potential customers are poor, their demand is thus low and their expenditure goes strictly to readily available basic goods. The likely outcome is that the new businesses fail, which then leads to vicious cycles of over-indebtedness that drive borrowers even further into poverty.
Mwine puts across valid arguments but misses a point when he apportions all these systemic failures on micro-loans. He seems to suggest that poverty reduction, consumer purchasing power capabilities and survival of small businesses are all dependent or should be stimulated by micro-loans. In fact, many critics of the microfinance industry have always pegged societal improvements or a lack of it on micro-loans and when this does not happen, the blame is shifted to micro-lenders and arguments around exorbitant pricing; unethical practices meted against consumers of MFI products by MFIs are raised in support of such arguments.
Microfinance, which is the provision of financial services – loans, savings, insurance, remittances, etc, plays a key catalytic role in supporting poverty reduction efforts, expanding small businesses growth or helping entreprenuers start small enterprises. Like any other development tool, it can only thrive in an eco-system were the rest of the supportive pillars such as markets, infrastructure, energy, security, etc, function well.
It is the role of government to support the creation of opportunities where its people can derive a livelihood. The ability to stimulate a vibrant private sector that supports producers of various goods and services through markets cannot be a responsibility of MFIs. The unfortunate bit though is that MFIs have found themselves operating in unstructured informal environments, helping thousands of struggling businesses access capital to remain afloat. Many of such businesses would otherwise have had no access to capital from the conventional banks due to eligibility constraints.
What we know is that MFIs bridge a very huge financing gap. With a varied product mix, they, for example, enable farmers to access loans as low as $30 to acquire improved inputs and implements to support agricultural activities; housing credit facilities help families improve their dwelling units and school fees loans see children return to school. If farmers cannot access markets or procure quality seeds, we cannot blame MFIs. Thus, while micro-loans have the potential to stimulate economic growth and create more entreprenuers, the ecosystem and different stakeholders should be working together to make this happen with each playing their role.
We also continue to see good examples of how micro-loans extended to women create ripple effects at the family level through improved nutrition of children, enabling families to access healthcare and improving housing conditions. While analysing the contribution of microfinance towards poverty reduction or job creation, we should not negate the fact that MFIs operate in an eco-system that must function for such schemes to generate the benefits we expect.
Mr Were manages a large scale financial inclusion programme for sub-Saharan Africa. were.nathan@gmail.com
