The microfinance (MF) revolution has been rapturously lauded for its far-reaching transformational effects of lifting thousands out of a position of hopelessness and abject poverty to one of hope and financial independence. The revolution, since its take off, has achieved sterling feats of making the poor more economically productive and rendering many financially inclusive. Impact assessments conducted on some very renowned members of the microfinance movement, countries that have proudly experienced all the vicissitudes of microfinance practice (India, Nepal, Sri Lanka, Thailand, Cote d’Ivoire, Niger, El Savador), revealed the following facts:
i. Microfinance had led to an increase in micro businesses which has resulted into increased income and employment, thereby reducing poverty and improving lives.
ii. Through access to finance, microfinance clients especially women, have now gained more respect from their partners, feel more dignified with boosted egos as they have found the opportunity of a say in family decisions and financial matters.
iii. Issues of education and healthcare are no longer much of a problem to the poor after having had access to microfinance, etc.
Microfinance has made a very positive and tremendous impact in addressing the financial needs of the poor, low-income earners, unsalaried workers, and the unbanked. There is even ample evidence to the fact that microfinance largely contributed to and facilitated the achievement of the Millennium Development Goals (MDGs) in most countries (Hannover, W., Steinwand D. & Nenfeld, C., 2005). However, this still leaves much to be desired as more could be achieved if the microfinance concept is really practiced as it’s supposed to be.
The MF concept as actually intended by its originator, Dr. Mohammed Yunus, saw to helping a group of Bangladeshi female basket weavers to be more economically productive as they were given some small amounts of money in the form of loans (from his personal savings) to expand their micro enterprises. His primary objective was to give these women and others who operated businesses of such menial nature and were generally excluded from the conventional financial system a chance to escape from poverty.
As a professor of Economics, a more enlightened person and one who relatively had superior knowledge in business management, Yunus did not only aid his clients with micro loans. But like the functionality of the operating principles of Venture Capital financing, he went to the extra mile of coaching his clients on the basic rudiments of managing their micro enterprises and the most optimal application of the funds he had made available to them. He established a closer acquaintance with them. In bothering himself with, and taking a rather deeper interest in the success of the business of his clients, the entrepreneurial ventures of the latter hardly failed as his idea also panned out and burgeoned into what is arguably one of the best performing financial institutions in Bangladesh and possibly the whole of Asia, the Grameen Bank.
Current Practice of Microfinance
The practice of microfinance today in most jurisdictions has been a complete deviation from originally intended. For instance in Ghana, there has been a heartrending and somewhat flagrant perversion of the very essence and core objective of the microfinance concept. Whilst the best practice of microfinance will strive to create a balance between MFI’s profitability and socially-impact programmes, current practices rather appear to be blatantly skewed to the favour of the former.
Most managers and staff of microfinance companies in current practice, have rather become more profit focused than helping the poor. Originally, the concept of microfinance was to help in generally alleviating poverty and improve the financial status of most households, particularly through women.
Unfortunately, the concept in many jurisdictions, has taken a turn to profiteering directions, with the focus been gradually redirected to the already affluent. And to add insult to injury, is a flagrant rejection of microfinance clients by their staff and officers as the ‘coaching’ component of the MF services is virtually missing. From the word go, the calibre of individuals who have formed the clientele base of MFIs have rather been usually not savvy in financial management, not much lettered, and unsophisticated. It therefore behoved on these officers to develop some sense of attachment and interest to the business of their clients by taking them through the basic rudiments of business management (i.e. record keeping, customer relations and maintenance, handling creditors and suppliers, inventory management, etc.)
Current practice of microfinance, particularly in Ghana has been a completely contrary one. Gone were the days when staff of some financial institutions such as ProCredit Savings & Loans, Opportunity International, and Womens’ World Bank Ghana Ltd. were seen all over town giving very necessary guidance and some information of vital importance just to ensure the sustainability and growth of the businesses of their clients. Like the instructive concept of Venture Capital financing, these financial institutions concerned themselves with serving their clients with services that saw them involving themselves to a certain degree in the affairs and running of these businesses.
The end result of such interventions were a burgeoned growth in the businesses of both the financial institution and its clients. Unfortunately, what pertains today as practiced by most MFIs rather stands in sharp contrast to the scenario recounted above. Most MFIs today only doles out credit to their clients without necessarily bothering themselves with how such monies are put to use.
How Venture Capital Finance Works
Venture Capital (VC) funding is a pool of fund from pension funds, insurance companies and high net worth individuals from which about 10% of the pool is usually committed to each riskier investment (termed ‘source deals’) with higher returns, usually startups for a stake (equity) in the business. Due to the risky nature of investments entered into by venture Capitalists (VCs), their overarching goal has always been to help businesses grow rapidly and to reap the greatest possible financial returns by eventually exiting the business through mergers and acquisitions or holding an Initial Public Offering (IPO).
Now, this is the bit about the venture capital financing concept for which microfinance can be modelled around; General Partners (simply referred to as GPs) of Venture Capital firms teams up with the management body of the investee company and runs the firm (usually for a period of about 5-7 years) until its balance sheet and infrastructure reaches a size sufficient and credible enough to invite further injection of liquidity.
This is where Limited partners (corporations and wealthy individuals who invested into the fund but do not take part in the active management of the investee firm) recoup their investments as per agreed terms. As a norm, the VC firm (the investor company) is always represented on the board of the investee company by GPs (a member of the fund who takes active involvement in the management of the investee firm). And then, as a form of compensation to the GPs for their work, an annual management fee of 2-3% of the capital committed to the fund is paid out to them as salaries and expenses.
The basic tenets of microfinance require a special relationship between practitioners and customers if it has to thrive. Lately, microfinance, particularly here in Ghana, has become a subject of ridicule at the least mention of it. Even though certain unfortunate practices has dented the image of the sub-sector, it is never too late for redemption. If conscious efforts could be made to place microfinance on its intended trajectory of alleviating poverty and rendering the economically inactive active, then much confidence could be restored to the sector.
The microfinance concept, as conceived and initiated by its originator, took a more coaching stance. It sought to create a somewhat very healthy mentor-mentee relationship. Current trends in the business of microfinance must go far beyond the well-trodden act of giving credit. It is more than imperative that operators of microfinance firms conduct follow-ups on their clients to provide the necessary help and guidance with regard to the effectiveness and efficiency with which credit provided is used. Such a relationship certainly sees both parties (the MFI and its customers) winning.
In this way, the MFI does not necessarily sacrifice its financial sustainability goal even as it tries to alleviate poverty through its social impact programmes. This is what Jonathan Morduch espoused in “The Microfinance Schism” as the win-win proposition (Morduch, J., 2000). And so, just like the worthy-of-emulating concept of Venture Capital finance, and as originally intended, microfinance could be patterned on the former (except for a few features as formalized management fee and exit strategies) to achieve a sterling successs.
Author: Lartey Stephen Sarpong
Microfinance/Development Finance Practitioner