Microfinance: Key to Achieving MDGs

Published on 28th September 2008

Micro-finance is an innovative strategy for the achievement of the Millennium Development Goals; at least for the first six goals, which are to: (i) Eradicate extreme poverty and hunger, (ii) Achieve universal primary education, (iii) Promote gender equality and empower women, (iv) Reduce child mortality, (v) Improve maternal health and (vi) Combat HIV/AIDS, malaria and other diseases.

 

Micro-finance is one of the development tools for fighting against poverty. It is globally accepted that globalization has become a key tool for breaking the poverty trap, particularly for women, who are mostly involved in small and medium-scale enterprises. People with access to financial services are able to improve their standard of living and are more likely to send their children to school and keep them there longer. In addition to financial services, some micro-finance institutions provide other useful services to their clients, such as offering health insurance, and promoting health insurance.

 

More than 75 per cent of the poorest people of the world live in remote, rural areas. Ensuring that rural poor people have access to the tools they need to build better lives for themselves and their children is a crucial first step towards the target of halving the proportion of people living in extreme poverty by 2015. Micro-finance allows poor people to have sustained access to employment, health, and education, among others.

 

Access to financial services through micro-finance strengthens the capacities of the poor to achieve the MDGs by their own means and in a lasting manner. The poor can increase and diversify theirs incomes, procure human, social and economic goods, and improve their existence in a manner that reflects the multidimensional aspects of poverty. Micro-finance can help the poor, through small loans, to break the circle of extreme poverty if this amount is invested in viable economic activities. The possibility of investing their savings in a safe place allows the poor to protect themselves against unforeseen mishaps such as illness or crop failure, which could easily plunge them into misery.

 

The rapid development of micro-finance in the Continent has had a significant impact on African populations, particularly the poor, a large majority of whom are women. For example, Global Development Research indicates that micro-credit loan in Bolivia nearly doubled the incomes of small business in nearly two years; and according to world Bank Report, in Bangladesh, 48 per cent of the poorest households which had access to micro-credit loans moved above the poverty line. In spite of this rapid growth of micro-finance institutions in Africa, access to financial services is still limited and concentrated in urban areas. Only one out of five households in Africa has access to financial services; less than 4 percent of Africa’s population has access to micro-finance; and only 1 percent has access to commercial finance. In addition, the cost of access to finance provided by micro-finance institutions is still extremely high for an African population, the majority of which is poor.

 

A number of measures need to be put in place in order to reverse the trend currently prevailing in many African countries. The Micro-finance sector in Africa requires huge investment in training in order to build the capacity of many people who are largely involved in SMEs. The success of micro-finance in Africa will require joint efforts by the governments, the private sector, civil society and other stakeholders. The following are some examples in which this could be done:

 

i. Engagement of informal economy: Statistics show that nearly 80 per cent of people in developing countries earn their incomes from informal sector;

 

ii. The role of governments: African governments to define their role and strategies in micro-finance. This should include providing finance means to save, access credit, and even encouraging people to start small businesses. At the same time, government should avoid relying on state-owed banks to extend rural credit and micro-finance services which have resulted in huge losses in the past. Both governments and private sector should also consider improving access to finance, particularly in the rural areas, by establishing rural credit banks;

 

iii. Private sector involvement: Encourage banks and private sector to work jointly together in supporting microfinance. This would involve provision of soft loans to SMEs, training opportunities, as well as creating revolving credit funds;

 

iv. Encourage group formulation. Collective and cooperative support has proven to be one of the most effective ways for improving microfinance in many African countries. Traditional financial schemes have resulted in increasing access to credit by many African people. Many banks have used the group formation and meeting to reinforce group solidarity, discipline and repayments methods, mainly through peer pressure.  Many microfinance institutions have benefited a lot by working through local communities grouping. Local grouping has been used a security against loans and this has improved their access to credit;

 

v. Target the poorest of the poor: Many micro-financial institutes give priority to the people who are able to pay back. However, this should also be extended to the poorest who are marginalized by giving them soft loans. This should also cover women who are to the larger extent, deeply involved in small businesses. In many developing countries, women constitute the majority of micro-entrepreneurs in the informal economy and many of them benefit more from micro-finance services. Women's status, both in their homes and in their communities, is elevated when they are responsible for managing loans and savings. The ability to generate and control their own income can further empower poor women. Research shows that credit extended to women has a significant impact on their families' quality of life, especially their children. Poor women also tend to have the best credit ratings. In Ghana and Gambia, women finance associations have proved to be the most successful micro-finance, particularly in repayments rate.

 

vi. Networks and linkages: There is need for a strong linkage among micro-finance institutions, banks, donors, NGOs, and governments.  A number of donors have provided significant amount of resources in support of micro-finance without being properly coordinated with government policies and programmes which has not benefit the poor people much;

 

vii. Avoid micro-finance projects from politics: It ahs been proved, in most cases that micro-finance projects are linked to politics campaign. This has resulted in poor coordination and management of micro-finance. Access to credit has been given to a particular group of people based on their political affiliations;

 

viii. Data quality: Improve the availability of data to monitor progress of micro-finance programmes and activities. You may agree with me that data on micro-finance for many countries is not up to date, making it very difficult to monitor progress as well as identify the need for micro-finance development.

 

ix. Mobilizing financial resources: Developing countries should much efforts in promoting innovative financial mechanisms such micro-credit programmes in order to mobilize savings and deliver on financial services to the poor people.

 

The African Union Commission has undertaken a study to elaborate a roadmap for the development of micro-finance for the African continent. The main objective of the study is to develop micro-finance in Africa in view of its important role in reducing poverty. In order to obtain views of micro-finance practitioners, the Commission recently held a workshop in Dakar, Senegal. It is now in the process of finalizing the study, taking into account the recommendations from the workshop. Some of the key recommendations of the workshop include the following:

 

i. Governments to be involved in the development of micro-finance, especially in providing a conducive environment for micro-finance, and ensuring that effective laws that support development of micro-finance;

 

ii. Governments to create/support training institutions that run specialized micro-finance courses given the capacity constraints in the micro-finance sector;

iii. Micro-finance institutions should put more emphasis on training and capacity building staff in order to improve productivity, professionalism and quality of portfolios;

 

iv. The need to encourage the networking and linkages among private sectors, focusing on capacity and institutional building of African micro-finance;

 

v. The AU to facilitate the elaboration of an African Micro-finance Charter and an implementation mechanism as well as the creation of a code of conduct for micro-finance in Africa; and

 

vi. The AU to encourage Member States to promote Public-Private partnership (PPPs) especially in the area of infrastructure.

 

A number of reasons have been the given to explain why Africa is lagging behind in developing its micro-finance. Two major factors attributing to this include, interest rates and unavailability of credit in most rural communities. Interest rates for many leading institutions are exceptionally higher that it is not possible for many small business to borrow money. Access to credit to many rural communities has been a big challenge, particularly due to weak institutional infrastructure connecting these areas. Many micro-finance institutions face high cost and default rates due to problems in monitoring borrowers after the loans are granted. This has resulted in a number of micro-finance institutions to provide limited resources, leaving out a large number of borrowers. For example, in Ghana and Tanzania, only about 5-6 per cent of theirs population had access to banking sector in 2004.

 

H.E Dr. Maxwell M. Mkwezalamba

Commisioner for Economic Affairs

African Union

 

 

 

 


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