Microfinance is the term used for describing the broad range of financial services and products targeted to the non-banked, under -banked who in most cases are not deemed bankable by traditional banks.
The concept of microfinance has over the years become have been well accepted as an efficient tool for the eradication of poverty in the developing world. It is, therefore, not surprising to hear of the various donor and government support this industry is receiving. In fact, the existence of microfinance institutions (MFIs) is key to bridging the huge financial gap that exists in most developing economies and also to help provide opportunity for the poor to have access to financial services. By their activities MFIs help in the distribution of financial resources within an economy to ensure an efficient distribution of these resources for the development of the economy. They serves as a medium for the mobilization of deposits from the surplus sector and transforms them into large loans to the deficient sector of the economy making them available for lending and other investments which include government borrowings for infrastructure development.
It is a known fact savings promote development and therefore economies that lacks saving mobilizing products lags behind in development. These and other facts make the concept of microfinance a very important element for developing economies.
There is a disturbing trend in the industry especially in most African countries which if not well addressed by stakeholders (governments, donors and microfinance actors) will undermine the impact and benefit of microfinance. The main disturbing trend is that, Microfinance has been reduced to the provision of only credit to the poor. The provision of credit to the poor has been given a lot of support as the main and most important requirement for the eradication of poverty. This is why it is common to find governments of most African countries channeling credits that has reduced interest rates to the poor in in anticipation of reducing their poverty levels. The main idea of this reduced credit is to make credit available and affordable to the poor to enable them wage war against poverty by investing in economic activities. This practice is an evidence to conclude that most governments in African and some donors in particular have come to believe that access to credit to the poor holds the main and most important solution for the eradication of poverty in the world.
Credits is an important ingredient in the fight against poverty, however, it is not the most important requirement needed to eradicate poverty in the world as it is being portrayed. In a more practical way, credits received by the poor are mostly directed to solve their immediate needs e.g. paying school, consumption smoothing, paying hospital bills,etc. This only creates a cycle of dependency instead of creating a reliable source of income for the beneficiaries. The truth must be accepted that that not every poor person has the capacity to manage an enterprise or is an entrepreneur capable of growing an enterprise. It is, however, also true that some of the beneficiaries invest this amount into productive ventures which in the long run improves their income level (this is part of what microfinance can to do). But the question here is how many poor people just by having access to credit have moved above the poverty line? The forgotten part of the equation is that microfinance alone cannot do the job of poverty reduction. If the poor in question do not have any productive economic opportunities to invest in than no amount of credit they receive can lift them out of poverty.
The challenging thing about providing credit to the poor is that, in countries where productive economic opportunities exist, the risk associated with financing the poor is high. These risks includes that fact that the yield from their productive activities are so small such that it threatens their ability to pay the loans that is, if they are not grants. Most of the produce by the poor or low income earners also lack ready market. In cases where majority of the beneficiaries are assisted financially to undertake the cultivation of a common produce during a particular season, a bumper harvest after the season may even lead to the reduction of prices putting a constrain on the clients repayment abilities. A good microfinance client under all these constraints struggles to pay off the facility under unbearable conditions and this makes him poorer than he was before. This is partly because the payment of the loan cannot be supported by his enterprise and therefore will have to make payment from other sources or from the sale of a property. The intended impact of the credit in this case becomes negative.
Governments determined to reduce poverty in some developing countries have bought into the concept of microfinance and some have even gone further to establish ministries or department and agencies in charge of microfinance. In this vein some have established micro credit fund that channels credits through the formal financial sector to the microfinance clients. The idea and conviction upon which these policies and institutions are built are in the right directions; however, they are not the ultimate way to kick poverty out of Africa our out of a country. A critical analysis of the use of credit alone as a strategy indicates that nothing much can be achieved if the fundamentals causes of poverty are not directly attacked. The fight of poverty is not a matter of credit alone especially when the basic infrastructures are absent in a country.
Governments have principal role in the fight against poverty and these roles are not only limited to providing credits for the poor. The roles of the government therefore should be focused on developing institutions, infrastructure, efficient macro economic policies, regulatory, and the likes that will make the financial system function effectively and efficiently so that the professional credit sellers (banks, rural banks, MFI’s,) can have the incentives of providing credits at competitive interest rates to well screened customers using the various lending techniques available to them. Lending to the excluded or the poor is very risky because of the seasonality of their activities, lack of ready market and prices fluctuation as well as inflationary risks which are high in developing countries. The other reason is that the high cost of lending associated to dealing in an environment without the necessary infrastructures cannot be overlooked (i.e. high transportation cost, high communication, high cost of obtain client information , etc) This comes to emphasize the fact that government active roles in maintaining healthy macroeconomic policies , investing in technologies for farming, building of good roads, hospital, providing storage facilities, etc will help improve the micro economic sector by ensuring that economic opportunities can be taken advantage by the poor who receive credit aimed at poverty reduction. A good example is that an affordable (in terms of cost and access) health care system for the poor implies that the poor will not have to use their hard earned income from their enterprises to pay for the cost of health care so that he can pay off a loan and still continue to be in a productive venture for his daily survival.
Microfinance as agreed by governments and donors all over the world has proven to be a reliable tool for the fight against poverty. However, since poverty is not only the absence of money but the absence of anything that affects the well being of an individual nothing much will be achieved in the fight against poverty if the other causes of poverty are not dealt with within a country. Government of poor countries with the strong sense of wining the fight against poverty should not only encourage access to credit for the poor but should go a step further to create good infrastructure in the countries to help reduce the uncertainties and risk associated to the enterprises of the poor people by proving economic opportunities that can be take advantage of by the poor.
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