By - Jamel Lahiani
Last decade was marked by a surge of the microfinance as method of financing small project in Africa. Different arrangements were considered involving NGOs, commercial banks, savings and loan companies, and other new types of institutions previously unknown in the region. Governments have also often sought to intervene with various credit programs targeting specific groups. These efforts were developed to limit the gap between the traditional institutions products and the financing requirements of expanding micro enterprises. The microcredit loan cycles are usually shorter than traditional commercial loans with terms from typically six months to a year with payments plus interest, paid weekly. Shorter loan cycles and weekly payments help the borrowers stay current and not become surprised by large payments. The new products are much diversified but have in common side, the fact that the loans are very small and addressed to poor clients who haven’t issue with formal banks. We can distinguish these standardized products.
The Income Generating Loan is one aspect of microfinance which is designed to provide microloans (very small loans) to poor clients. The proceeds of which are meant to be used as capital for self-employment projects that generates income and alleviates poverty.
The micro- housing loan is a housing loan product targets lower income client who may use the loan for housing improvement or completion of stalled housing projects. The repayment capacity is based on ability to use the loan to generate future income.
The Emergency Loan is available to all clients over the course of a fiscal year. The amount and repayment terms are agreed upon by the micro-finance institutions (MFIs) and the client on a case by case basis. The amount is small compared to the income generating products and is only given in times of dire need to meet expenses such as funerals, hospital admissions, prenatal care and other crisis situations.
The Individual Loan is designed for clients and non-clients that have specific needs beyond the group lending model. Loans are given to an individual outside of the group lending process. Amounts are typically higher than that of the income generating loan and repayments are less frequent. Applicants must complete a strict business appraisal process and have both collateral and a guarantor.
Outside of this standardized model of micro loan, some organizations had started a Self-sustaining micro finance initiative issuing collateral-free, interest-bearing loans, for as little as $50, to poor women in rural East Africa to start businesses to support their families. These microcredit loans are funded by donation and international charity. We can speak about, WMI Women’s Microfinance Initiative, which is tackling global poverty and the disenfranchisement of impoverished, rural women in East Africa. Launched in 2008 in rural Buyobo, Uganda, WMI has provided over 25,000 microloans to chronically poor women in Uganda, Tanzania and Kenya, many supporting AIDS orphans. Borrowers start small businesses and use their profits to pay for school fees, food and healthcare. Communities benefit as borrowers hire helpers and advocate for local improvements. The borrowers’ priorities for the use of their profits are: better nutrition, healthcare and paying school fees for their children. WMI provides outreach in all of these areas by empowering women with options to provide better their families.
The South Africa experience shows that Microcredit has been a disaster for the poorest in South Africa. The micro loan was seen to rapidly bring new jobs, incomes, empowerment and dignity to the poorest black communities and townships, expectations of rapid progress ran high. But the result was negative for twice.
The first, the microcredit aimed to support the smallest income-generating activities, but in practice is increasingly all about supporting consumption spending. In South Africa, the microcredit movement has created an incredibly risky and expensive way to support the immediate consumption needs of the poorest. Many of the poor individuals had been forced to repay their microloan by selling off their household assets, borrowing from friends and family, as well as simply taking out new microloans to repay old ones. For far too many now “financially included” individuals in South Africa, using microcredit to support current spending has been a disastrous and irreversible pathway into chronic poverty.
The second, the business activities that emerge are simply not the drivers of sustainable development and poverty reduction. The rafts of new street traders, barrow boys, spaza shops and the like have generated very little, if any, positive impact in South Africa’s poorest local communities. Centrally, late-apartheid South Africa already possessed a very large informal economy in the black townships, one that was composed of exactly such simple low-capitalized no-growth activities.
Microfinance is not far from the credit problems of the classical bank system. Payment of the credit could be a problem so a selective allocation of credit could be the solution. This means that not any poor person should be able to obtain the loan. In particular, representatives of very poor population, lacking stable income, living by means of chance earnings, and particularly having debts (in relation to community facilities, relatives, friends, etc…) should not be clients of microfinance, since in case of microcredit non-repayment, they will have more debts thereby becoming poorer. For such people special programs of social assistance is needed, which should be able to support main needs of people living in the poorest dwellings, lacking garments and food.
For this, a non-financial assistance by the microcredit institutions, like Evaluation of technical feasibility of the proposed project is recommended. Also, selective criteria could be established to avoid the risks of no payment of the loan. The loan can’t be allowed for the purposes like:
Microcredit model and its supporters aimed to generate income and alleviate poverty. But, it has been widely discredited because of the debt snowball problems. Extracting the poor from the grip of the microcredit movement will not be easy. However, good selective criterions of the credit allocation can be the solution. The other peoples excluded from the microcredit allocation can have a social help from the governments and NGOs. In that case, the governments have to assume theirs roles and obligations.
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