By Amin Kef Sesay
On February 12, 2021, His Excellency President Bio launched a significant would-be socioeconomic game changer aimed at financially empowering women and youth groups across the length and breadth of the country called the National Micro-Finance (MUNAFA) Program.
Speaking, he noted that previous speakers indicated that there is a large informal sector comprising hundreds of Micro, Small and Medium enterprises. One major challenge they have consistently highlighted is “Access to Finance”.
The fund, he said, will empower MSMEs to get on the credit ladder and build a healthy credit history.
Good and fine, many have commented. However, many people The Calabash spoke to over the past weekend that have had their fingers badly burnt by the embers of micro credit said categorically, that if they have a better option, they would never opt for micro credit. We shall come to the reasons why.
Microcredit has been in the spotlight in this country since the 1980s. This innovative banking program, pioneered by Professor Muhammad Yunus, has created the option for millions of poor people, especially women, to become self-employed entrepreneurs.
By empowering women, microcredit has created opportunities to lift countless families out of abject poverty. Clearly, this has been a net gain for society.
Yet current criticism of microcredit points to its failure to alleviate poverty, high indebtedness of borrowers, high interest rates, coercive loan-collection tactics, lack of transparency in public fund management, and uncertainty of succession in leadership.
Many previous micro credit victims confessed to this medium to have been forced to pay interests rates that far exceeded what the original principal was by the time they finished paying off the loan.
Others confessed that overwhelmed by the burden, they fled their residences; some said they migrate unwillingly to the provinces, and some from the provinces to the city to escape their creditors.
Supporters of micro-credit maintain that millions of borrowers cannot be wrong who seek microcredit support worldwide.
Microcredit, they argued, eases a binding credit constraint, thus raising income and productivity and reducing poverty.
Despite the hype given to micro-credit as an elevator for poor entrepreneurs, one practitioner in the field surprisingly stated that microloans are more beneficial to borrowers living above the poverty line than to borrowers living below the poverty line because most times than not, the borrowers divert the loans to personal use and consumption.
In which light, observers of the micro-credit climate point to lack of entrepreneurship forces of micro-entrepreneurs to take on repeated loans, creating a vicious cycle of debt dependency.
Conscious of the benefits of microcredit that include: disbursement of quick loan under urgency; helping poor people to meet their financial needs; provide an extensive portfolio of loans; promote self-sufficiency and entrepreneurship, its critics state that one major cause of indebtedness they noted is inadequate insurance to protect the poor against economic and natural disasters.
High interest rates—up to 40 percent in some cases—coupled with very limited grace period to start repayment are another major concern. Lenders, who view interest rates as returns to capital and a screening device for identifying creditable borrowers, usually set rates without considering the purpose of a loan. Critics recommend that interest rates should be set uniform but determined according to the loan’s purpose.
From an administrative and managerial point of view, critically, for the success of the scheme, the mechanism under which funds are transferred to the poor must be transparent and ensure the long-term sustainability of both borrowers and lenders.
If microfinance institutions divert public funds to diversify the microfinance portfolio, then the poor must own, or at least accrue the dividends from, such ventures.
Transparency in running publicly-funded organizations—including policies and practices on the question of leadership succession and ownership—is also required.
Both borrowers and lenders require protection. This means setting appropriate interest rates, ensuring better access to subsidized funds to support innovation, and protecting the poor and their savings entrusted to microcredit institutions from any coercive practices by such institutions. In which sense, institutional takeover by Government for political reasons would be counterproductive.