Microfinance

A bad idea that we simply cant let go

There are lots of micro financing groups in my home area, literally you would expect the residents of such an area to be getting rich and richer but practically many are disappearing into Diaspora every now and then and the reason is they have a micro loan debt that they have failed to pay back. They are forced to disappear for fear of being thrown into the dungeons. I don’t blame them because I personally don’t want to be thrown in there and I don’t think there is any one with such a wish. But who is to blame? Is it the growing micro-finance institutions or the people that are tired of being poor and want something in their sight that has a taste of good life in it?  Since micro-finance first came to public attention in the 1980′s, the usual story line has been that creation and expansion of micro-enterprises are funded by micro-finance, producing additional income that lifts the borrowers’ households out of poverty. But is it true?

If, most ( if not all) micro borrowers use their loan proceeds for non-business purposes, as proved by research over the past years off course,
If recent analysis has cast doubt on some of the older research studies that found that micro-credit increases household income,

And if the  new generation of more rigorous randomized studies on micro-finance are yet to find evidence that micro-credit raised household income and consumption,

Then we are left with no option but to conclude that micro-credit could be a bad idea that we simply can’t let go.

Why??

In my experience with micro-finance I’ve always been inquisitive about whether micro-credit raises incomes as praised by its pros. Micro-finance does some things that are very important to poor people, helping them to cope with poverty. Its easy to cope with poverty if you have something giving you hope for the better. It’s like betting, the possible win amount makes you think the bargain is fair to some extent, and you easily forget about losses in stakes. When you take a travel through the financial life of the poor, there is a high-resolution picture of how low-income households actually use financial services. The picture proves that the problem with being poor is not just that income is low, but also that the stupid low income tends to be irregular and exposed to interruption attacks resulting from several issues factoring in the lives of the poor.  Such lifestyle forces them to borrow abnormally to cope with poverty. The problem is the financial tool they need to run such a life is just not in place at a local level. The low life financial tools are just un-trusted. Now this is exactly where micro finance squeezes its self into the poor man’s life. Micro finance is a little more un-flexible but it has a strong foundation, with more trustworthy modern management tools to support the abnormal borrowing habits of the poor. But why does poverty persist among these borrowers? Apparently, it’s due to the high interest rates attached to loans granted by the micro financing institutions. However that’s not only it, social stigma from failed attempts at entrepreneurship, institutional constraints on lending practices, and the inability to recover quickly from setbacks such as natural disasters and personal loss such as the death of a household earner weigh heavily on the side of the poor in managing funds from these institutions. We can not blame them because at the heart of finance lies risk management. 

If you look at the rate at which these micro lending institutions are growing, you may be left with questions like, with the high lending rate, how come? But we react this way only because our own basic consumption needs are slightly if not hardly threatened. In other words these poor people have no other option. They take the credit forcefully but the force is unconscious. They see the micro-finance problems from a very different angle and honestly it’s a lot more difficult to display the arguments on their opposite side of things for them to see. Considering the intentions of micro-finance those pushing for its success are disappointed but if their customers are not complaining why should they?

Micro-credit only helps poor people deal with their problems I once alongside my sister took a micro loan from one of the institutions, to implement one of her dream projects. I will create a scenario to try and explain my findings;

You will borrow 30 dollars, and invest it. The 30 dollars will return 5dollars in 30 days as profits. Now for your up-keep in a month you spend 2 dollars, and the institution requires 3 dollars as profit on the 30 dollars, which is paid in a month. But you are required to pay in installments daily hence in this case that will be 1.1 dollars every day. Now at the end of the loan period if your business is regular you will have managed to live a smooth life on 2 dollars from the profit and sold your business empty to repay the loan. You close your business at the end of the loan period, and maintain a clean name at the credit bureau, making yourself able to get another loan, and the cycle repeats itself, if you choose to take another. This is clear “debt dependent petty trading.”

Micro-finance institutions make decisions based on sound analysis. They operate in abnormally risky markets, hence there is need to mitigate risk. Micro finance has such a huge market that you almost never have to advertise .usually the loans are repaid at extremely high rates year after year, when the main motive to repay is not collateral or group pressure, but rather their desire to keep future access to loans which is very and I repeat, very,  likely.

Money lenders
The rich people today are running out of investment ideas and many fear loss. Some resort to money management with a bank as there future target and some of these are not even professionals. These use innovative and often contractual techniques to provide loans to people who would otherwise not qualify for typical loans from banks. Such individuals render government regulation very difficult and due to the fact that they pursue profits their growth is very fast and above all irresponsible. They have led the way in making tens of millions from micro lending with negligible effects on the overall development. Many entrepreneurs are following their example since entry into the micro-credit industry is easier once a base of consumers has been established. As a result, villages have up to ten micro creditors offering loans.
There is a lot of competition among the Money lenders for the few that are willing and able to get a loan from them. Some of these financing forms go to the extent of making there interest rates negotiable thus pulling as  many as possible to at least see if they are in position to get some money from them. One thing these borrowers forget to notice is the irresistibility of such money alongside the marketing agents of the respective institutions. Money, says the famous proverb, makes money. Thus without money it’s difficult to get money. When you have got a little, it’s often easy to get more. The problem always arises with the quest to get that little, and this quest is implanted in every human being that is fighting for good life. This character is what the micro finance marketing agents graze on to ensure one gets a loan from them. After you place ink on the doted line, they shake your hand ….pleasure doing business… bla… bla
But I some how like the charity character that is involved in the micro finance approach. The lending is directed to specific individuals or groups of individuals, who really need it to an extent that they see it as a favor.  And if you try to go deep into trying to understand micro-finance, you get confused at some moment because its aims are unclear as regards to what happens in its practical world. Its development is completely irregular and not easy to understand, it runs contrary to development history, which starts with savings, it’s not smooth at all. It’s based on lending, not savings, and use inappropriate Asian models. Actually without poverty micro-finance can not thrive.

Micro-finance is pretty attractive if you listen to stories but statistical analysis shows the real impact on the poor. Inevitably, some customers will thrive, others will be unchanged, and some may slip backwards. Its impact is poorly measured, and opinion is based on heartwarming stories of success, not on rigorous assessments of reality.

There are success stories to support the fact that micro-finance satisfies its claims, and there are statistical data that proves the whole idea of micro-finance wrong. There is no clear judgment on whether micro-credit raises incomes and consumption. If the unreasonable expectations placed on micro-finance are actually realistic as proved by success stories, then I think Micro-finance has not failed yet, but the micro-finance industry, in large part, has as proved by the statistical data.