April 3, 2008

Microfinance has a bright future in Africa’s development

Story by JAMES MWANGI, Nationmedia

IN THE EARLY 1900s, OIL MAGNA-te J. Paul Getty was once quoted as saying: “If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” Little did he know that barely 100 years later, a revolutionary banking model would turn his perceived world view on its head.

One might argue that Getty was a millionaire with little time for the poor. However, his perception is not far-fetched, judging by the common perceptions held regarding the provision of financial services in developing countries.

The foremost danger our people face today is the inability to get out of debilitating poverty. The reasons are varied, but the most fundamental, and perhaps most visible particularly for entrepreneurs, is lack of finance to start off.

I am under no illusion about the challenges of doing business in a growing economy like Kenya, but examples abound where the injection of small loans has turned people into notable businessmen, let alone making it possible to feed, clothe and shelter a family.

THE OVERWHELMING ADVANTAGE of microfinance, which generally refers to the making of tiny loans to people who would otherwise not access credit, is not that interest rates are low. It is that it makes it possible for poor people, many without collateral, to access credit.

A Sh10,000 loan, a pittance for many in the middle class, can be the beginning of a successful business for the vegetable vendor, commonly referred to as Mama Mboga, or the Jua Kali artisan.

Most financial institutions would be reluctant to advance credit to this group of people because of the perceived risks, high cost of transactions, and inability to provide collateral.

Our experience, however, demonstrates that given the chance, the poor can manage risks better than many ordinary folks. They can build assets, increase their income, and enjoy the resultant higher standard of living. In ordinary circumstances, the default rates are also much lower than would be expected among small-scale players.

This experience should provide the way forward for all those who genuinely want to minimise poverty in the developing world.

If we think about the trillions of dollars spent in poverty alleviation programmes in the developing world and the fact that the intended impact still remains a mirage, we are greatly pained that few people have seriously rethought the development paradigm.

Poverty is not lack of money, or indeed, of jobs. Poverty is the lack of power to determine one’s own destiny. Where that power is present, jobs and money will also be present.

The problem with aid is that it produces victims of philanthropy, who are forever grateful, timid and ever expecting more. Microfinance is the typical “teaching people how to fish and not giving them fish for one day.” Anyone who receives credit to open or expand a business, however small, is a client just like the well-established business mogul.

Microfinance does have its drawbacks, chief among them being that it is based on trust rather than conventional commerce. Should the business fail, the lending institution will have little recourse, as there is no collateral to fall back on.

It is interesting, however, that Equity Bank has one of the lowest non-performing loans in the industry. This is despite the fact that the majority of our borrowers have no collateral in the conventional sense. What they have is trust and backing by their fellow entrepreneurs.

I strongly believe that microfinance provides part of the solution to the question of “power”. I would be wrong to assert that it is the panacea to all the problems of poverty, but I must admit that it is a working model that is now the subject of study by many leading institutions including the Harvard Business School.

Given the foregoing, the question that stands out is what we ought to do with microfinance to make it more effective.

I DO NOT SUPPORT THE IDEA OF BO-rrowing one’s way out of poverty as not every enterprise can grow on loans. It is, therefore, critical that microfinance lenders carefully assess the business model of every borrower, his credit history, and provide financial advice. It is senseless to rush into giving loans as it may hurt, rather than help, the borrower.

This is an area the Government and development partners such as the World Bank should invest in actively and incrementally. The area of sharing risk with poor borrowers should be explored.

Finally, and perhaps the most important, microfinance cannot be a substitute for adequate infrastructure development, provision of security, sound fiscal policy and good governance. These provide the highway on which the small-scale business must ride. Without them, great business ideas would be stillborn.

Dr Mwangi is the CEO of Equity Bank. These are excerpts from a speech he delivered on the future of microfinance during the 10th Annual African Business Conference at the Harvard Business School.