Microfinance through the Looking Glass

Microfinance offers savings and loan products as well as financial training to individual entrepreneurs in developing countries. Traditionally, banks have not provided financial services, such as loans, to clients with little or no cash income. This is due to the high cost of processing loans and the fact that most poor people have few assets that can be secured by a bank as collateral. Because of these difficulties, when poor people borrow they often rely on relatives or a local moneylender, whose interest rates tend to be very high. 

Famously led to success by the economist Muhammad Yunus in the 70s, in Bangladesh, microfinance has been growing rapidly with $25 billion currently at work in loans. It is estimated that the industry needs $250 billion to get capital to all the poor people who need it.  Women are generally the primary focus of services since evidence shows that they are less likely to default on their loans than men.

In practice microfinance is not an amazing thing. It’s a collection of small offices with sketchy lighting and wooden partitions; it’s a bunch of ordinary workers and some people with stalls in the market. But what it offers is banking to those for whom a bank account was out of reach and had previously rested above their field of vision. It offers security to those who’ve never had a safe place to put their earnings and an opportunity to think about investing in new products or equipment. Subsequent business expansion and a 10% interest on savings means that over time people find that they can pay their children’s school fees or send money to family members, and so the way it impacts lives can be significant.

What I like about the scheme is that it’s a micro-development project that focuses on individuals. Microfinance doesn’t require fundraising as it isn’t wholly dependent on charity and as a social enterprise it doesn’t operate entirely outside the market system or dampen entrepreneurial activity as food aid for example has been known to.

Unfortunately the merry story isn’t without its problems. The system can easily fail, as seen in the State of Andhra Pradesh (India), for various reasons such as lack of use by potential customers, over-indebtedness, poor operating procedures, neglect of duties and inadequate regulations. On the market today one of the ladies running a small shop was really angry. She had saved enough to be granted a loan- the amount required for a loan is 400 GHA cedi, or £120- but the loan hadn’t arrived. The answer given by the field officers is that it takes time to process. The problem is deeper than that- funds are drying up at the bank. Nana, the organisation’s founder in the UK, is currently applying for funding from various international organisations. If it doesn’t come quickly enough people are going to start demanding their savings back. The shop owner said she didn’t have cash to top up on certain products like sugar and her customers would go elsewhere. If the loan doesn’t arrive by the end of this month she won’t have enough to buy the extra stock needed in time for the Christmas rush.