Why Microfinance?

Published on 1st January 2008

Microfinance is not necessarily a panacea for the eradication of poverty but one among a multiplicity of strategies available for fighting the scourge. The multidimensional characteristic feature of poverty requires, not one strategy, to extinguish it. Most African countries have very weak financial systems. The World Bank cited Kenya, Mauritius and South Africa as exceptions. Fewer than 20 percent of African adults have an account with a formal or semi-formal financial intermediary. This, as stated in Honohan Patrick and Beck Thorsten in Making Finance Work for Africa is as true for the savings and payment as it is for credit and lending. The World Bank report by Honohan and Beck clearly shows that African economies are seriously under banked. This has a crippling impact on economic growth as people, especially the economically active poor that are locked in the rural spaces, fail to have access to financial services.


Microfinance is meant to deepen the financial system so that the poor can also have access to financial resources. Poverty is largely a rural phenomenon in Sub-Saharan Africa. This has seen the greater majority marginalized from the financial mainstream. The objective of rural microfinance is to realize an inclusive financial system so that the economically active rural poor have access to a full package for financial services that will enable them to escape poverty. Micro-finance is a proven but under-utilized development and poverty reduction tool.


Microfinance for SME Development:


Building an “entrepreneurship culture” is an investment in valuable “social capital” for business. Small and medium sized enterprises (SMEs) potentially constitute the most dynamic firms in emerging economies. Although they are most likely to move into areas of comparative advantage and high value addition, they often face economic, institutional, and legal obstacles. Hindrances include limited access to working capital and long-term credit, legal and regulatory restrictions, inadequate infrastructure, high transaction costs, and limited managerial and technical expertise. Despite the presence of multiple and often interrelated constraints, however, the widespread belief, on which policies to support SMEs are based, is that the lack of finance constitutes the main obstacle to the growth of SMEs.


SMEs are powerful contributors to the Gross Domestic Product (GDP) of many countries. Narayan Deepa in Empowerment and Poverty Reduction: A Sourcebook records that the the informal sector is responsible for 83 percent of new jobs in Latin America and Caribbean and 93 percent of new jobs in Africa. In India, 90 percent of the non-agricultural workforce is in the informal sector with little access to financial services and social protection. In Peru, micro and small enterprises account for 95 percent of all the firms in the country and provide 50 percent of national employment. In Bangladesh, micro-enterprises account for 90 percent of all the firms in the manufacturing sector and 40 percent of total employment. In Macedonia, small enterprises account for 39 percent of the GDP and 25 percent of employment. In Philippines, 99 percent of firms are micro-enterprises employing 55 percent of the country’s labor force. Approximately 80 percent of adults in Zimbabwe eke out an existence in the informal sector, either through subsistence farming or through informal employment in towns.


In spite of these statistics, development of small to medium enterprises fails to feature prominently in development plans of the majority of African countries. This is manifest in the manner in which the access to financial services by these groups receives marginal attention. More than 78 percent of the people in Africa live in the rural areas and between 65 and 72 percent are poor.


According to Marris Peter and Somerset Anthony in African Businessman: A Study for Entrepreneurship and Development In Kenya almost all the African businessmen interviewed (more than 67%) cited lack of capital as their greatest difficulty in doing business. Access to financial services by SMEs, especially those that excluded in the rural areas, will lead to a large contribution towards the development of rural economies.


Access to financial services led to the innovative use of technology in Bangladesh. This case came to be popularly known as the “telephone ladies” of Grameen Bank. The programme involved linking the poor to the markets through access to information. The Grameen Telecom (financed by the International Finance Corporation-IFC) provides phone services to the rural poor through local entrepreneurs. Grameen members who are mostly illiterate women are given loans to buy and operate cellular phones, charging villagers. Fifty percent of the calls are made by the poor people, mainly for economic reasons, that is , checking out current prices before meeting a  purchaser, prices of and markets for other goods and consulting doctors. It is estimated that the phones generate real saving of between $2.70 and $10.00 for calls that substitute for travel between villages and Dhaka, the capital of Bangladesh. As of March 2002, around 10,000 village phones were in operation. This programme benefited both the local entrepreneurs and the villagers because they realized some economic value in terms of profits and real savings respectively.


African countries can also replicate the same so as to empower the rural people with access to communication technology, information (to avoid information asymmetry) and markets.

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