Micro-Finance - What Role in Africa's Development?
Harare, Zimbabwe, August, 17 2011 -
The honeymoon with micro-finance is over. Since the idea of lending or giving very small sums of money to poor people was introduced to the world by the pioneering Grameen Bank in Bangladesh, the approach has been taken up by many non-governmental organisations, donor agencies and the United Nations as an essential part of their poverty-reduction efforts.
Micro-finance has provided countless people with access to financial services.
But over-indebtedness of micro-finance clients in Andhra Pradesh has recently led to numerous suicides and a political crisis in India's fifth-largest state.
And controversy has swirled in Bangladesh around Mohamed Yunus, Nobel laureate and founder of the Grameen Bank.
Together, these events have generated a backlash in public perceptions of micro-finance.
Should development practitioners respond by abandoning efforts to bring financial services to the poor? Or should they seize on the heightened interest generated by the recent troubles to reassess the strengths, weaknesses and potential of microfinance?
Such a reassessment may be especially pertinent in Africa, where poor people's access to formal financial institutions remains very limited.
A critical innovation
Incomes in poor households are typically not only low, but also irregular.
Poor people need to be able to smooth consumption flows or finance larger expenditures, but they generally lack access to banks and other formal facilities.
Traditional financial institutions generally shy away from this market, either because they are unaware of it or because they deem it unprofitable.
Poor households and individuals, for their part, have difficulty proving their credit worthiness because they lack clearly defined property titles and other assets acceptable as collateral.
Some argue that channelling scarce resources into unproductive micro-enterprises in the informal sector may actually be detrimental to sustainable development and industrialisation. This is because tiny businesses contribute little to building an economy's productive capacities, or to its structural transformation.
Potential in Africa
Drawing from experience elsewhere, it seems clear that micro-finance is not a magic bullet. On its own it cannot fundamentally transform African economies held back by many structural constraints.
Yet providing a whole range of financial services to the poor including credit for small and micro-enterprises, savings facilities, insurance, pensions, and payment and transfer facilities - is clearly desirable and can contribute to the achievement of the Millennium Development Goals.
Africa has seen an increase in such services in recent years. Micro-finance institutions offer a variety of products.
Where such institutions do not reach, traditional and informal providers such as the tontines in Cameroon, the susus in Ghana and the banquiers ambulants in Benin continue to serve the poor.
Their informality limits their potential to expand their activities, however, and they often charge high rates.
Farmers can insure their crops against adverse weather conditions, with payouts made directly to their mobile accounts if weather conditions indicate crop failure.
Policies and support Still, micro-finance institutions in Africa lack the capacity to match the needs of the poor.
They suffer from structural weaknesses.
The support services for them are of uneven quality, if they exist at all. And supervisory and coordinating bodies often have only limited resources. It is unreasonable to expect microfinance to fundamentally transform African economies.
And it cannot replace progressive social and economic policies for structural transformation, poverty reduction and job creation. But in light of the continent's persistent poverty, it can play an essential part for the foreseeable future in providing basic financial services to the poor, and thereby help advance Africa's development goals.