E. Mwine, Uganda: Giving Micro-loans to the Poor Doesn't Even Up Society or End ...

Nov 2015
Uganda, November, 02 2015 - We need to set up the right systems for small businesses to succeed, such as strong subsidies, state assistance, and welfare support to prop up entrepreneurs when they fail.

Micro-financing has recently been the most prominent mechanism used to lift people, especially in developing countries, out of poverty. By 2012, 27 million Africans had accounts with micro-finance institutions, representing 4 per cent of the total population of the continent. The highest rate of penetration was in West Africa, and the highest growth rate of micro-finance services was in Eastern and Southern Africa.

Despite the extension of micro-finance Institutions and services in Africa, the quality of lives of people leaving below the poverty line on the continent has not improved, and the gap between the wealthy and the poor is widening tremendously. In fact, the demand for micro-credit has also increased but with no significant, or even, equivalent growth in the incomes of the poor.

Advancing micro-credit to the poor has far reaching implications at both ends which undermine the intentions of both the lending institution and the borrower. Because both players seek to maximise the benefits; deriving their means from each other, a predatory relationship emerges, with the most unfair taking the day.

In many developing countries, it's very expensive to provide micro-credit. Setting up and processing small loans, collecting repayments and dealing with default raises the administration cost disproportionately to the size of the loans, and so, the interest rates that you have to charge in order to get the sustainable credit system going, ends up negating the institution's relationship with its borrowers.

The borrowers on the other hand, use the funds to start small businesses, which encounter a lack of consumer demand, after all, their potential customers are poor, their demand is thus low and their expenditure goes strictly to the basic goods that tend to be readily available. The much more likely outcome is that the new businesses fail, which then leads, once again, to vicious cycles of over-indebtedness that drive borrowers even further into poverty.

For the poor, most microfinance loans are used to fund consumption - to help people buy the basic necessities they need to survive. In South Africa, for example, consumption accounts for 94 per cent of microfinance use. As a result, borrowers don't generate any new income that they can use to repay their loans so they end up taking out new loans to repay the old ones, wrapping themselves in layers of debt.

The problem with microfinance institutions is often that they don't finance good, distinctive business ideas for avoidance of risk. Funding people to sell the same things they have already seen others selling, or to get involved in handicraft schemes, doesn't get them thinking about risk and reward.

There is, however, much more, as a medium term intervention, we could try, than just enable the poor have access to finances and an improved ability to spend.

We need to set up the right systems for small businesses to succeed, such as strong subsidies, state assistance, and welfare support to prop up entrepreneurs when they fail.

We need to start a form of micro-financing that focuses on savings first. It is critical to emphasise savings before borrowing because asset accumulation enables poor people to make sensible decisions about the allocation of their resources including when and when not to borrow.

Above all, governments need to invest in innovations and not just entrepreneurship. Governments have the monopoly of all the tools of coercion and with the authority and resources in their control, they ought to lead by example and set pace for the private sector. Private sector players can be drawn to a competition away from just entrepreneurship and small businesses to grand innovations which come with lesser risk, more jobs and more profit rewards.

In the same regard, governments should lead in easing access to capital to finance innovation. Interest-free venture capital schemes controlled, financed and efficiently regulated by governments can help break the predatory behaviour of micro-credit lending, profit motivated entities that easily leave innovators trapped in a debt cycle.

Source : allAfrica

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