Dr Keen Mhlanga
It is not necessarily wrong to reduce poverty and make some money on the other side. The question, however, arises as to whether that is indeed what is happening with microfinance.
Microfinance institutions are currently experiencing very high repayment rates of between. Coupled with growing loan sizes by clients, these institutions are even making profits.
No wonder there seems to be a good reason for the world to celebrate the microfinance revolution in developing economies as Zimbabwe. Microfinance is the means of providing a variety of financial services to the poor, based on market-driven and commercial approaches.
These services may include savings, insurance, money transfers and credit. However, the microfinance movement to date has generally favoured microcredit, which is the provision of small loans to households who are perceived to be too poor to qualify for loans from formal financial institutions.
As it stands in Zimbabwe, the microfinance industry registered a 290,47 percent increase in aggregate sector net profit over the year from $439,39 million for period ended December 31, 2020, to $1,72 billion, largely driven by adoption of digital and electronic banking services which facilitated a reduction in operating costs.
Poor households are caught up in a vicious cycle of poverty, where labour, their best resource, is “locked up” due to different constraints including a lack of liquidity.
The household’s productivity as such is limited to a level whereby the available household income is insufficient to sustain good standards of living.
For example, a poor household may have family members who are willing to work in the family garden to grow sufficient food crops. However, if they cannot afford improved crop varieties and farm inputs then it will not be possible for the family to grow enough food.
The household’s labour is therefore said to be locked up due to a liquidity constraint among other constrains. Many governments and donor communities believe that the liquidity constraint is the most important constraint impeding poor households and that if it is addressed it will be possible for households to escape poverty.
Economists argue that to break the vicious cycle of poverty, there needs to be an outside force that will break the vicious chain by injecting some liquidity, thereby unlocking the household labour.
Microfinance promises not only to break the vicious chain of poverty but also to initiate a whole new cycle of virtuous spirals of self-enforcing economic empowerment that leads to increased household well-being.
The role of microfinance in financial systems, whether global or local, is to provide financial services and a substantial flow of finance to the economically marginalised populations often neglected by the formal financial sector.
With the evolution of microfinance in developing economies, people excluded from conventional financial systems have three access to alternatives to save and borrow rather than having to rely on their family and friends, or usurers and tontine.
In both developing and developed economies, microfinance offers an alternative to conventional financial services and plays a significant role in facilitating the financial inclusion of disadvantaged populations.
Microfinance has been recognised as an important instrument to fight poverty by major organisations worldwide.
MFIs’ social aspirations commonly include poverty reduction, job creation, gender empowerment, economic growth, social inclusion, and eventually contributing to social development.
Microfinance has the capacity to increase self-employment and create microenterprises in developing countries. With the assistance of microfinance, households are able to expand opportunities for income accumulation, thus allowing people to provide for their families.
Having access to credit can help stop poverty in the immediate term, disrupt the cycle of poverty by making money available, and facilitate potential business opportunities. Microfinance has also been known to cater to underserved and disadvantaged populations like women, disabled people, the elderly, the unemployed, and those who simply wish to meet their basic needs.
Families may save and even invest in better housing, healthcare, and education, making the positive impacts more sustainable and 4 lasting. Through the help of microfinance, entrepreneurs in developing countries and impoverished communities may survive, operate, and even thrive by creating more employment opportunities for others.
Participation in a microfinance program is associated with higher levels of consumption, better nutrition, generally uplifted standards of living, and growing economies.
Since a majority of the world is forced to survive on the equivalent of just $2 per day, microfinance becomes a solution that can help more people be able to improve their living conditions hence the positive impact of micro finance in developing nations as Zimbabwe.
Most banks will not extend loans to someone without credit or collateral because of the risks involved in doing so, yet those in poverty do not have any credit or collateral.
By extending microfinance opportunities, people have access to small amounts of credit, which can then stop poverty at a rapid pace. In many developing nations, the primary recipient of microloans tends to be women.
Up to 95 percent of some loan products are extended by microfinance institutions are given to women.
Those with disabilities, those who are unemployed, and even those who simply beg to meet their basic needs are also recipients of microfinance products that can help them take control of their own lives.
Women are key figures in leadership roles in business, even in the developed world. Catalyst has reported that companies with female board directors are able to obtain returns that are up to 66 percent better in returns on invested capital and 42 percent better in terms of sales returns than companies with male board members only.
Women also develop others more frequently when it comes to entrepreneurial roles. This comes from coaching, feedback, or investments. Even in the developed world, women helping women is an economic force that poverty can’t stop. The problem with poverty is that it is a cycle that perpetuates itself.
When there is a lack of money, there is a lack of food. When there is a lack of clean water, there is a lack of sanitary living conditions.
When people are suffering from malnutrition, they are less likely to work. A lack of sanitation creates the potential of illness that prevents working days. Microfinance changes this by making more money available.
When basic needs are met, families can then invest into better wells, better sanitation, and afford the time it may take to access the health care they need.
As these basic needs are met, it also means that there are fewer interruptions to the routine. People can stay more productive. Kids can stay in school more consistently. Better healthcare can be obtained.
This creates a lower average family size because there are more guarantees of survival in place. And when that happens, the possibility of future investments will occur because there is more confidence in being able to meet basic needs.
Microfinance is also able to let entrepreneurs in developing countries be able to create new employment opportunities for others.
With more people able to work and earn an income, the rest of the local economy also benefits because there are more revenues available to move through local businesses and service providers.
Microfinance is one way of fighting poverty in rural areas, where most of the world’s poorest people live.
It puts credit, savings, insurance and other basic financial services within the reach of poor people.
Through microfinance institutions such as credit unions, financial non-governmental organisations and even commercial banks, poor people can obtain small loans, receive money from relatives working abroad and safeguard their savings.
When self-employed people of disadvantaged areas improve their businesses and income, it’s also positive for people around them. They’ll be able to spend more money within their community to provide for their family and participate more in the local economy.
Microfinancing has been hailed as a veritable tool for the socio-economic growth of less developed economies in the past few years. The role of these institutions has been said to encompass a wide range of the economic life.
In this direction therefore, its ability to ensure socio-economic equity is through its activities to the less-reached by the mainstream financial services has come to be a veritable anchor for the emphasis of these institutions in developing economies.
Dr Keen Mhlanga is the executive chairman of Finking Financial Advisory. He can be contacted on [email protected] or +263719516766