By: James hawkins – AfricanBrains
Firstly, what is micro finance? By very definition, it’s meaning can vary dramatically. The Consultative Group to Assist the Poor gives the following explanation:
Microfinance is often defined as financial services for poor and low-income clients. In practice, the term is often used more narrowly to refer to loans and other services from providers that identify themselves as “microfinance institutions” (MFIs). These institutions commonly tend to use new methods developed over the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. These methods include group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly.
More broadly, micro finance refers to a movement that envisions a world in which low-income households have permanent access to a range of high quality financial services to finance their income-producing activities, build assets, stabilize consumption, and protect against risks. These services are not limited to credit, but include savings, insurance, and money transfers.
Such small-scale mixed-origin financing is very important for Africa. Common estimates place 1.7 billion people as living in poverty today, meaning they lack basic human needs – clean water, nutrition, health care, education, clothing and shelter. Shelter, or housing, has a significant impact in this figure – approximately one third of the world’s population live in slums, and there are over 100 million children in the world living in the streets without parents. The United Nations Centre for Human Settlements provided figures which illustrate how the problem is particularly bad in certain regions of the world – in Latin America, households need 5.4 times their annual income to buy a house, compared to Africa where an average of 12.5 times the average income is required. Not only is the use of such funding vital, but the fact it is lent to low-income individuals with few fixed assets, is crucial to those in such situations.
The Grameen Bank set up in Bangladesh was one of the first examples of microfinance aid, back in 1983, originally intending the small loans to enable the economically poor in rural areas of India to make use of their skills by growing businesses. The need for microfinancing to be used for housing specifically, however, has become increasingly obvious – in a 2010 conference held by the Centre for Affordable Housing Finance, the Habitat for Humanity and others, it was revealed over 30% of microfinance loans claimed for small business or other uses in Africa was diverted into housing projects to fulfill people’s basic needs.
However, microfinance – due to it’s very nature – can have terrible consequences if it isn’t introduced carefully. There have been many problems with such schemes making very large profits from the poor, particularly in India which has seen many defaulting or even committing suicide due to the stress caused by having to payback ill-advised loans. A general lack of finance infrastructure can also hamper the delivery of such loans – for example, the Gates Foundation is using some of it’s money to help existing savings institutions and credit unions because households are losing a significant fraction of their money because they’ve got no way of keeping their savings secure. They tend to save money in illiquid assets, such as livestock or jewelry, with possessions being pawned to free up cash – the problem is that this incurs a significant cost every time it takes place; cows die and pawnbrokers make money.
As with many types of aid, microfinance is crucial, but certainly has its potential to cause as many problems as it solves. Even in more economically developed countries, the issues of lending to those with low or unreliable incomes has become all-too-obvious since the credit crisis over the summer of 2008. Whilst in more economically developed countries, we’ve just experienced greater unemployment with a lucky few merely cutting their expenditure on luxury goods. The effects would have been far more severe in countries without such high levels of social security. If a large-scale microfinance program could be introduced with carefully-defined lending terms, economies of scale could help keep its publicity and administrative costs low, whilst borrowers could be provided with a clear, trustworthy picture of what to expect.