James Mwangi (CEO Equity Bank) in a recent Business Daily article alluded to the transformation of factors of production. Quoting Dr. Boulding, he argued that factors of production in the 21st century are no longer land, Labour and Capital but Entrepreneurship. This was a strong affirmation coming from a banker of global repute.
On land, he was spot-on. Formal finance, as known today must have been established when land was the most important factor of production. When you had much land, you were rich and highly credit worthy. When you had less land or none, you were poor in the eyes of the formal lender and a high credit risk. Banks discriminated you for that.
The formal lender had an obligation to protect the bank and its portfolio. He had to ensure the client had the ability and willingness to repay the loan. Equally, he had a genuine reason to manage risk and ensure loans delivered were secured. The collateral options open to him were few. Land had value and landowners were prominent members of the community. There was emotional attachment to land too. However, while the old banker is gone, his traditions and myopic view on land as collateral has been upheld by some of the present day bankers.
In the 21st century; wealth will not come from land, but from human capital, networks, ability to organize teams, participation in value chains, access to information, adoption of technology and innovation. The effective lender of today and tomorrow is one who will lend on the basis of ideas, innovation and creativity instead of land. This is what will set lenders apart in the 21st century.
This is the quintessence of microfinance, a humble concept with massive positive impact on financial access. If financial services matter to the rich, they matter even more to the low income. To reach low end folks with financial services, microfinance circumvents traditional collaterals such as land. It embraces collateral substitutes readily available to the poor. Microfinance has no reverence for land, and it will not fail to lend you because of lack of it. Yet, most of the microfinance institutions maintain very good quality portfolios (most of the times better than the formal lender), while serving a risky clientele with no tangible assets to offer as collateral.
Bankers need to embrace the microfinance flair and blend it with their way of doing business. Failure to cuddle this today will mean missing the future Bill Gates (Microsoft), Somen Brothers (Access Kenya) and other financial gurus. The young men and women making it today in information technology and communication sectors have no land of their own to give as collateral, but an innovative mind. They are full of ideas. It’s these ideas we should innovatively lend against.
Further, the post election violence in Kenya has demeaned land as collateral. The ownership issues are getting complicated to the lender. It has become an emotive political issue. Yet politics and loans are not the best of couples. Politics takes advantage.
Soon, bankers will cease to insist on land. They will incorporate the microfinance model and provide loans based on reputation and value of relationship. The young entrepreneurial minds previously considered risky for banks will be banked. The laggards, old school type lenders will be left to play “catch-up” a pushy and unstrategic way of doing business. Fortunately, the enterprising Kenyans will thrive and Kenya will be better for it.
The conventional banker is realizing that microfinance makes business sense with its double bottom line. It’s profitable. The adventurous and innovative bankers who saw an opportunity and embraced the business model sometimes back are smiling all the way. Microfinance at best provides micro-loans and serves micro-entrepreneurs, yet offers huge returns to investors and shareholders. It’s really a precursor of the future evolution of finance. No wonder the banking sector in Kenya is falling-over each other to serve the micro and small enterprise clients.
By Charles G. Njoroge
Microfinance Trainer and Consultant, State University Bergamo, Italy
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