If you answer the above question correctly, a ton of pearl millet is waiting for you at eMKambo. When many organisations across the globe are merging in order to sustain some level of competitiveness, why are developing economies finding it sensible to take the micro finance route? There is enormous evidence showing that companies that can drive economic growth do not use micro loans to fuel their activities. Instead of transforming the formal financial sector so that it can fully support exploitation of natural resources, African policy makers are registering more micro finance institutions.
For example, Zimbabwe had 143 registered Micro Finance Institutions (MFIs) in March 2015 and by 30 June 2016, the number had risen to 164 registered MFIs (15% increase within a year). On the other hand, the country has 14 commercial banks, most of which have an SME division which deals in micro loans and therefore competes with MFIs. Taking into account the existence of SME departments within commercial banks and many unregistered MFIs, it means micro finance is much larger than what is visible.
For agricultural-based economies, it is serious mistake to finance agriculture through MFIs, especially when MFIs do not understand agricultural markets. Saving is about opportunity costs which formal financial institutions prefer to ignore. Borrowers such as farmers and traders are rational decision makers who can weigh how much it costs them to save money in a financial institution three months when they could spin such money more than five times in their agribusiness during the same period.
How far can African economies run on micro wheels?
African reserve banks should answer many searching questions. Why are they promoting more micro finance institutions when banking sectors are already congested and economies are not growing fast? Since some MFIs are now taking deposits, should people do away with banks and deal with MFIs? You can only do so much with a micro loan. By going micro, we are limiting people’s entrepreneurial imagination and innovation. Besides confusing people by not clarifying these issues, the micro finance fever is encouraging double-dipping in ways that weaken national economies. A micro finance culture locks targeted clients such as women and youth into vending and a survivalist mindset when they should be aiming for growth. The more micro your focus the more you take your eyes off the big picture.
A micro finance culture is also incentivizing rent-seeking and unethical financial practices. For instance, when banks see that their licenses do not allow then to charge certain interest rates, they go into bed with MFIs in order to milk clients. That way, they end up benefiting from interest rates as high as 20% when the law says they should not charge above 10% interest. Rather than certify dozens of MFIs, why are African reserve banks and ministries of finance not promoting the organic growth of savings clubs into village banks? Such organic growth is more sustainable unlike the current scenario where MFIs are taking over community savings clubs models and introducing bureaucratic structures that contravene the original social cohesion at community level. As a result we are losing valuable knowledge on how communities have financially sustained themselves for generations. As if that is not enough, many MFIs are riding on livelihood projects by development partners. As soon as the projects comes to an end, MFIs pack their bags and leave. As a result, communities start rebuilding their local savings clubs from scratch.
What is the difference between MFI and Commercial Bank in terms of services?
To ordinary people, commercial banks and MFIs offer the same services although MFIs are famous for high interest rates. SME departments in commercial banks compete with MFIs for clients. The situation would be better if there was a recognized pathway along which clients like SMEs can graduate from MFIs to commercial banks on the basis of business performance and growth. Since such pathways are missing, most MFIs convert business loans into consumer loans. Cases where 30 -40% of MFI loans end up going to school fees are very common.
Business potential and viability as superior collateral
Besides limitations explained above, the banking sector in every African country is failing to develop appropriate financial products which recognize the fact that a business’s potential and viability is superior collateral than immovable property. By not recognizing such an important resource, financial institutions get obsessed on saving at the expense of wealth creation. Saving money is not useful if that money cannot create meaningful wealth. Business viability, including associated relationships and communities of practice, should be in the fore-front as fundamental components of collateral. One should get a loan on the basis of business potential and growth. However, due to reluctance by banks to fully consider business contexts, many SMEs end up resorting to micro loans as an emergency or desperate measure. When loans are more of emergencies and stop gap measures, the rate of default increases. The onus is on banks to completely understand businesses they support. At the moment, many SMEs take loans as a last resort because banks have not bothered to creatively know their clients’ business dynamics.
The myth of separating business from family
Most African banks and MFIs are still hooked onto the notion of supporting profit-driven enterprises instead of embracing the social entrepreneurship component which ensures a win-win outcome. No business person can survive without taking care of family needs. Banks should not continue to kid themselves thinking that there is a clear boundary between business and family. That is a big myth. Considering the socio-economic nature of African businesses, especially SMEs, banks should extend loans that have two parts – 70% business needs and 30% household or livelihood needs. This can be accompanied by two repayment strands (business and family). It doesn’t help to continue pretending that a borrower whose child has been chased away from school for lack of school fees will ignore that urgent issue when s/he has borrowed money for business. The reality is that s/he will pay school fees with part of the loan and work hard to repay it. It is therefore important to introduce a two tier loan facility which caters for business needs and household needs. That way, clients will fully open up about their circumstances.
Limitations of the agency banking model
While the agency banking model has made some in-roads into African economies, it has started revealing serious loopholes, one of which is the big brother mindset by banks. An agent such as an agro-dealer will have invested a lot in building a niche market and, here comes a bank interested in working with the agent but not keen to recognize and compensate prior investments. As a result, the agency banking model becomes a burden to the agent. Financial institutions should ensure the principle of agency banking is informed by reliable evidence. Banks should conduct research to find out how much it would cost them to set up a new branch and develop a market niche as opposed to riding on what the agent has already done.
Evidence from such research should inform the crafting of appropriate revenue sharing models based on special skills and experiences brought by each agent rather than introducing a one-size-fits-all revenue sharing model skewed in favour of the bank. Many banks and MFIs are just getting into agriculture markets and start issuing out loans without supporting the market as institution. Their assumption is that money is the only most important business factor. That is why many models are suffering still-births. Supporting a very small part of the value chain does not entitle banks to claim a larger share of the profit. How can you expect to reap everything when you have just provided resources for harvesting yet the farmer put all the other resources including seed?
Towards alternative models
Financiers are not assisting their clients such as traders to develop their markets. On the other hand, they still insist on group lending which does not give enough room for individual brilliance to shine. Why should champions be yoked with slow movers? Policy makers should desist from locking small businesses into micro-financism. Rather than impose financing models, development partners and governments should help economic drivers such as irrigation schemes establish their own needs-based and contextual credit facilities. Loans for horticulture should be different from those intended for livestock. Such segmentation is fundamental for success. Meanwhile, the potential and limitations of micro finance in driving authentic economic growth remains an unproven theory in many African countries.
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