Microfinance in Africa needs clear definition
Blog written for Business Fights Poverty by , Barclays
Since the incidents of how some people who could not repay micro finance loans were treated in India, many have asked if Africa will face similar problems, and if so how can we prevent such occurrences. I have been thinking a lot about how we define 'microfinance' and what microfinance institutions are. I believe that a focus on the definition of what microfinance is and what it is supposed to achieve is important in ensuring that people who take services from microfinance institutions actually benefit.
Over the last few years, many organisations have been established calling themselves microfinance institutions. However, microfinance is not just about providing banking services to people who cannot get access to formal banking or lending small amounts of money to ‘poor’ people. The unfortunate cases in India have proven that access to finance does not always bring benefits to the poor. True microfinance goes much deeper. It is about providing sustainable and commercially viable financial services while at the same time ensuring that the financial services provided improve the lives of the recipients. This is vital if the provision of financial services is to help improve the lives of the poor.
These two aspects of microfinance should serve as a check and balance on the activities of microfinance institutions. They also explain why true microfinance is a big challenge and not always easy to deliver successfully. As soon as many players rush into the field within a short time period, it must raise alarm bells for all of us. If an organisation wants to provide only financial services to the underbanked or low income population, it does not have to put the label of microfinance on itself. If it wants to, then in addition to the commercial services, it must provide, directly or indirectly, other services that ensure that the lives of the people it serves are also getting better. This is a big challenge and not always easy to achieve. Ensuring that a poor person’s life is improved by accessing financial services, is not easy to measure, but that is the challenge of microfinance and what makes it exciting! For those who want to offer microfinance services, they must be able to find that balance between social and commercial objectives.
The demand for financial services, especially for the unbanked in Africa, is large. Many poor people require financial services in some form, either from the formal or informal sector, to survive and improve their lives. For centuries people have provided valuable financial services to poor or low income people and will continue to do so. The difference microfinance brings is that in addition to the commercial products, it is committed to improving lives. Finance is not an end in itself.
In my opinion, defining microfinance clearly, as suggested above and monitoring both aspects will ensure that microfinance brings the intended good benefits to the many unbanked in Africa. Such an approach will reduce the number of microfinance institutions being set up, but in the long run, it will establish a robust and strong sector hopefully devoid of the sad stories we have heard from India.