Microcredit has taken the centre-stage in the definition of microfinance. Although it forms only one of the several components in microfinance, microcredit has received the tag as the most important component that possesses the needed solution to help address the challenge of poverty in most developing countries.Microfinance is a multi-purpose developmental tool that includes the provision of financial and non-financial products and services targetted at the poor and low-income earners and aimed at improving the livelihoods of these beneficiaries by increasing their ability and capacity so as to enable them take advantage of economic opportunities within their communities.
The whole developmental approach of microfinance, which involves improving the livelihoods of the many poor, can only be achieved if economic opportunities exist for the beneficiaries to take advantage of in order to enable them achieve a higher return on their micro-investments.
The microfinance approach to building economic capabilities of the poor and low-income earners has come to stay.
This can be traced back to the failed results recorded in the supplying of approved grants disbursement to poor clients in addressing poverty versus the demand-driving approach. The element of grants cannot be entirely eliminated in the fight against poverty; however, the over-concentration on it in times past has not given developmental workers and governments the expected results.
It is, therefore, not so surprising that today; the world has come to accept microfinance as a tool for poverty reduction. This is not without opposing views from others who are of the strong opinion that Microfinance has not contributed to addressing poverty as heralded by the “believers of microfinance”.
Many more people have come to believe that credit is the one important thing in microfinance that can do the job of poverty eradication. In view of this, most microfinance institutions and stakeholders have emphasised the granting of credit more than any other products within the context of microfinance.
Recent developments in poverty reduction programmes make it quite important for governments and donors depending on microfinance to solve a developmental challenge to see microfinance beyond the provision of microcredit.
This should even affect the laws and acts governing microfinance -- in such a way that policies and acts or laws will go beyond the underpinning of microcredit to include guidelines that necessarily incentivise MFIs and other players to be conscious of the developmental nature of their activities, and not only think of prudentially keeping sound financial records for the regulators.
History available in Ghana shows that microfinance has evolved from savings (susu, the traditional way of saving money) to the provision of credit. To date, however, savings and credit have remained the two main products of most MFIs -- with microcredit taking a large percentage of the product line. Government and Donor support in microfinance has also largely been in the form of making funds available to the MFIs for on-lending purposes.
The truth, however, is that credit support to the MFIs alone without extending other forms of support to the sector will limit the ability of these MFIs in contributing to poverty reduction as seen in other countries. For example, Government and developmental partners can support the microfinance sector to develop risk-mitigation products like micro-insurance to support the impact made by microcredit in the event of natural disasters. Additionally, the sector can develop products to support the financing of affordable homes for poor clients, especially in the farming areas of Ghana, on a demand and sustainable basis.
With the interest to invest in microfinance soaring high across the world, the incentives and rewards for the shareholders cannot be overlooked in the bid to achieve the developmental objective of microfinance.
Shareholders of Microfinance institutions, like any other shareholders, have a good appetite for high profits; more so than for the related impacts that their activities can generate. The focus on profit, therefore, is preventing the development of innovative products that can help solve the needs of the many poor clients.
The incentives and rewards for shareholders have also contributed to the incidence of high interest charges for microloans amongst many other factors.
High appetite for profit has contributed to MFIs not serving the very people who may need their services. Instead, MFIs can now be seen trying to compete with the traditional banks over their salaried clients by offering salary loans. Today, the issue of tangible collateral has also become a core requirement in granting microfinance loans.
There, without a guarantor or compulsory savings, the poor for whom microfinance was developed are being denied access to microcredit. With these recent developments, it is very difficult to draw a clear distinction between the traditional bank and a Microfinance Institution -- although in technical terms there are so many differences between these two concepts of financing.
The classical theory of Microfinance involves providing a bottom-up development approach to complement the concept of trickling-down development through industrialisation. It is important for players therefore to note that achieving developmental objectives cannot be done if conscious efforts are not put in place to design products and services that can assist in improving the capacities of the targetted groups.
The truth is that an over-reliance on microcredit alone will not transform the lives of the people; there has to be a calculated approach to solve the various challenges that still hinder the progress of the poor.
Developmental workers and Microfinance operators should therefore consider a broader perspective within the context of microfinance that will include micro-insurance, micro-education loans, micro-housing, money transfer services, micro-enterprise, etc.
As long as the products on the microfinance market are designed without the needs of the poor clients in mind, nothing much can be done to improve on their livelihoods and therefore produce the needed economic impact expected.
This is highly corroborated by Mohammed Yanus (the Nobel Laureate) who indicated that “we must keep our attention on the wisdom from the clients. The report tells us that when asked what they (poor clients) want for themselves and their families, their answers include 'education for their children, health for their family, decent housing that keeps the rain and cold out, and regular, nutritious meals.'”
To improve the contribution of Microfinance to our developmental challenges , there should be a conscious effort by all -- especially MFIs, Government and Donors partners -- to help support the development of products and services that do not only improve the bottom-line (profit) of the MFIs, but can also help address the challenges faced by the microfinance clients.
The writer is the Microfinance Technical Officer of the ARB Apex Bank .e-mail roayeh@gmail.com
By Roderick Okoampah Ayeh
