The development of microfinance in Africa

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The Origins of Microfinance

microfinance

Microfinance has existed in different forms for a long time. However, it is generally considered that “modern” microfinance emerged in the mid-1970s in Asia and Latin America. Priority is given to the example of Bangladesh and the Grameen Bank founded in 1978 by Dr Muhammad Yunus, Professor of Economics at the University of Chittagong. Dr. Yunus was looking for a concrete response to the famine crisis his country was going through at the time.

Through practical work with his students on investment theories, this brilliant Bangladeshi economist discovers the extreme financial poverty of his fellow citizens who manufacture bamboo stools and have no way of building up stocks of raw materials. However, their need for credit is very small: a total of 27 dollars for 42 farmers who cannot access banks.

Having lent them this sum from his pocket, he can discover how much their activity increases, when they can buy the raw material in advance, thus avoiding significant price fluctuations. He formalized this experience by creating in 1976 the Grameen Bank (the “village bank”) which offers loans to poor people in Bangladesh and whose success inspired many other experiences around the world.

The “village bank” was born and popularizes solidarity credit, a credit granted to a group in which each of its members is in solidarity with the others, to take advantage of it and repay it. Grameen Bank offices are now present in more than 80,000 villages, with more than 6 million borrowers. In 2006, Professor Yunus was awarded the Nobel Peace Prize.

Microfinance is now considered the most promising tool in the fight against poverty and banking exclusion. By granting microcredits, collecting savings, offering micro-insurance, microfinance institutions (MFIs) renew financial activity through practices as innovative as solidarity loans.

However, the real impacts of microfinance have yet to be confirmed, with many difficulties in assessing its effects on targeted populations. However, the future development of microfinance remains dependent on its superiority over other tools in achieving the objectives assigned to it. Hence the need to develop more rigorous impact studies and to reflect on the sources of funding for MFIs in a context of the growth of ethical finance and socially responsible investment.

Objectives of microfinance

Microfinance implements simple financial products adapted to the needs of the poor in order to fight against the many dimensions of poverty. It is based on motivations such as freeing people from a constraining informal system, contributing to the empowerment of a category of poor people (women, youth, etc.), and providing financial services essential for the success of broader development programmes.

Microfinance is the provision of a range of financial products to all those who are excluded from the traditional (those with low incomes and therefore can be described as poor) or formal financial system. Its main objective is to contribute to the improvement of the living conditions of the poor. Microfinance is also an essential tool to combat vulnerability (a condition linked to an unexpected drop in income and/or a sudden increase in spending).

Microfinance aims to reduce the vulnerability of poor people by providing them with credit to strengthen their activities while controlling them.

The limits of microfinance in Africa

After having been adorned with all the virtues: the fight against poverty, the emancipation of women, the democratization of civil societies and many others, micro-finance is often in the position of being accused today. We see poor people pushed into debt, unable to repay due to exorbitant interest rates, women abandoned or even beaten by their spouses who blame them for their new freedom, or villages destructured as a result of repayment difficulties. Access to financial services must be considered a right.

microfinance

Microfinance can quickly increase family debt and even lead to over-indebtedness. Contrary to some prejudices according to which a small loan would be enough to encourage microentrepreneurship, the effects in terms of job creation are very limited for the moment. The obstacles are both individual (attachment to wage labour, however precarious and exploitative it may be, or to agriculture, however unprofitable it may be) and collective: local monopolies, market segmentation and access to information, limited local outlets due to a lack of purchasing power.

The benefits of microfinance in Africa (potential studies)
A recent study by the Office of the United Nations Special Adviser on Africa suggests that it is high time to redefine the role of microfinance in Africa’s development. Microfinance is not a magic formula. On its own, it cannot transform the African economy under various structural constraints.

While providing a range of financial services to the poor, including credit for small and microenterprises, savings facilities, insurance, pensions, transfer and payment facilities that are undeniably attractive, micro-finance can contribute to the achievement of the Millennium Development Goals.

Recently, Africa has seen an increase in this type of service. In areas that are not covered, traditional and informal institutions such as the tontine in Cameroon, the susus in Ghana, and mobile bankers in Benin are still serving the poor. The informal nature of their activity limits their scope of action, and they often apply high interest rates.

For example, in Côte d’Ivoire, Ghana, Mali, Mali, Senegal and elsewhere, the popularization of mobile phones has transformed this sector, particularly in communities that did not have banks. In Kenya, mobile phone money transfers are at record levels. Launched in 2007, the remittance service called “M-pesa” had more than 13 million customers at the end of 2010. They can now earn modest interest on mobile bank accounts.

Conclusion

Microfinance in Africa needs to be rethought. Microfinance has raised many hopes on the continent. But many abusive practices require a re-examination of the sector.

The microfinance sector was born barely thirty years ago, with a mission to fight poverty that few could dispute.

Providing microcredits to marginalized women to help them start their own businesses seemed to be a solution with irrefutable results.

Once the issue of effects had been resolved, all that remained was to create sustainable institutions. The focus shifted from beneficiaries to microfinance institutions (MFIs), which had to be profitable and have high quality loan portfolios.

Clients must be put back at the heart of microfinance: this means first understanding the financial needs of the poor. They do not only need short-term productive microcredits to finance the working capital of their microenterprise. They also need and already have informal access to savings, consumer credit, insurance, transfers and payment systems. Like any consumer, they optimize funds and do not hesitate to divert them from the stated objectives to meet their needs.

Ghislaine TOVIHO

BONDS & SHARES

BONDS & SHARES is a participatory non-Profit information platform for, through and by experts in finance and business. For more information please visit www.bonds-and-shares.com


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