Micro lending can help to improve lives of households, communities

  • 10-31-2011

My neighbour Mariam Hamis entered my house one hot afternoon running and sweating profusely without knocking and she went straight to hide under a large dining table. She greeted no one and said nothing. “What is the meaning of this? What are you hiding from?” I demanded to know but her response was just shhhh.

But then I heard noises at her house where a group of about ten people had surrounded her house. The local leaders were also there and after a few minutes they started taking furniture and other belongings out of the house, including beddings.

Only then I learnt that my neighbour had taken a loan from FINCA Tanzania and failed to repay back and those who came to confiscate her belongings were her guarantors. The hiding was almost useless because they took away almost every valuable item.

This is the game in micro lending field and some few cases of drama like this of my neighbour Mariam Hamisi are common to defaulters.

Professor Abdallah Yunus is known to be the founder of a popular micro leading methodology which is widely practiced in the world today. Having introduced this methodology in 1976 in Malaysia under Grameen modal the replica quickly picked to Africa and Latin America, the home to the majority of the poor.

Basically micro lending targets the poor in the sense that they have no qualities to access normal bank loans, you may see here whoever that we are not talking of the poor who go hungry, without clothes or shelter but those small entrepreneurs who have no qualities like collaterals to access bank loans.

Microfinance lending involves small financial credits landed to the poor of micro entrepreneurs without the need of collaterals, business write ups, legal documentations licensing and permanent premises.

Under micro lending there are basically two methodologies involved that mitigate or provide alternative to the requirements to access loans.

They include group lending and individual lending. Group lending basically include solidarity groups whereby borrowers form small self selected groups that in turn guarantee each other.

Each individual in the group gets his or her own loan but the issue of guarantor-ship, monitoring of the utilization of the loan and repayment discipline of each individual borrower is the responsibility of the group itself as witnessed in the case of my neighbour.

Ideally these groups are expected to be self administered with minimum supervision from the loan providers so they provide basis for guarantor-ship and self monitoring.

This method is most popular in Tanzania preferred by most financial institutions because of its simplicity, easy administration and low operational cost.

Each of the group members must have an income generating activity known to other members who in turn provide guarantor-ship and continue to monitor the utilization of the funds and repayment.

Clients under this modal must meet regularly according to schedules at the offices of the service provider to make repayments, get new loans and listen to announcements. This helps to monitor each individual and group commitment, discipline and faithfulness.

This modal follows a strict time management discipline whereby punctuality and attendance are as important as repayments. Fines are always imposed on those who diverge and there is also compulsory serving kept by the loaner to reduce the burden in case of default.

Supporters of this methodology attribute this strict discipline coupled with strict loan repayment schedule to the success of the methodology which actually portray low level of default cases however such strictness and programmed procedures scared some of the prospective customers especial those with busy enterprises.

Group lending also include village banking whereby clients are not supposed to meet as a class but through their self selected groups, open group bank accounts where loans and repayments are made. After meeting all the requirements each individual gets his or her loan through the bank and repayments are also made through the bank by leaders of the groups.

These groups also provide a pool for compulsory serving that add to the cohesion of the group and insurance in case of default.

Individual lending has gained popularity in recent years especially after formal banks stepping in. Individual lending also include loans to employees under the guarantee of employers. However, apart from its demonstrated speed and cheep administration, it has proved to be risky. Individual lending takes very short time to process.

The client is supposed to open a bank account and have a licensed business that has been in operation for at least two years. For employees what is needed is employer’s consent.

But as pointed above individual lending is some how risky. While default rate with group methodology stands at 3 per cent to 5 per cent default rate with individual methodology stands at 45 per cent which means out of each 100 clients who access loans 45 beneficiaries fail to pay back.

Micro credits have been proved to empower the poor and improve their living standard when used appropriately. In Malaysia, for example ‘grameen model’ has been able to improve living standard of communities and households by raising their income while itself growing into a large bank.

In Tanzania, studies conducted by several microfinance experts like Dr kimei and Dr Chijoriga have shown positive impact of the credit to the communities and households. One of the impacts is the increase or growth of working capital which is one of the motoring stumbling blocks to many of the poor.

Although there are no clear statistics and ratios of house hold income growth due to lack of records, proven revelations from those who take such loans show that most beneficiaries have been able to increase the volume of their business and sometimes diversity to include other business. Most of them say they have increased the number of employees and have improved household spending in terms of education, health and food quality.

They also reveal increased purchasing power of families to acquire more property like furniture utensils and clothing and above all an implicit benefit whereby clients increase their skills to manage their business through strict discipline, punctuality, customer care and record keeping.

The programme also inculcates in the minds of customers a culture of saving through compulsory savings imposed as a pre-qualification to access credits on the other hand government revenue collection increases with improved and diversified enterprises.

As a spill over benefit, beneficiaries become more confident and independent. They become free, optimistic and dependable this is obvious as they possess economic power and become more respectable in their respective communities.

Generally micro lending has demonstrated positive and significant impacts at both family and community level. This makes it a real companion in poverty alleviation efforts. Currently it is estimated that at least 400,000 people access these credits about one fifth of all micro entrepreneurs countywide.

But always there are unlucky ones like my neighbour Mariam Hamisi who end up loosing their hard earned property instead of prospering. There a number of reasons to this, one of them being individual knowledge of business before taking the loan. Some take loans without having any business and fail to establish new businesses due to strict repayment schedules.

In general micro lending is also prone to problems and challenges that constrain borrowers, the most notorious setback being of high flying interest rates. Credit providers have been blamed for charging high interest rates which in turn drain borrowers instead of helping.

The Market interest rates in this field of microfinance stands at 30 per cent per year which is already a burden to the borrower but some service providers charge very prohibitive rates up to 60 per cent per annum. This is apart from other expenses like service charge registration fee, loan application fees, insurance fees, compulsory loans insurance funds (deposits) and fare to and from the office.

Sometimes these interest rates are not openly expressed to the borrower but somehow disguised when borrowers lake these loans sometimes do not know the implication and the real cost of their loans.

When I visited one microfinance institution at Mbagala Habitat or makazi Bora as the area is known, I was given a brochure which show that they charge interest rate of 5 per cent but when I decided to join and fill in membership forms I realized that the 5 per cent interest was charged per month which means if one borrows 1,000,000/- is supposed to pay back 1,600,000/- per year equivalent to approximately 140,000/- per month. The interest of 600,000/- is too much to these poor borrowers and some times exceeds the profit margin they get as result some of them end- up losing their property and closure of their businesses.

Sometimes they are forced to access other loans from other institutions, hence becoming highly indebted and unable to service multiple loans. But also such clients run away causing a lot of problems to other guarantors who must pay back the whole loan plus interest.

The programme also lack grace period which would allow the client to organize themselves before paying back their loans as once a client takes the loan normally repayment starts immediately within six days.

In some cases in the beginning some clients return part of the same loan and not profit accrued hence putting themselves in danger because the loan has not been utilized properly.

The programme also seems to be somehow rigid as borrowers in many cases fail to grow with the size of loans. The guarantee methodology of solidarity group fail to yield with bigger loans because their combined servings and insurance cannot cover up the whole loan in case of default given the nature of their business which are traditionally small.

With bigger loans repayments installments become very big and as experience show most of the borrowers can be able to improve their living standards in terms of furniture and household spending without expanding their business.

With all its sweet success stories and bitter huddles entailed in this field of micro finance lending, government interventions is necessary to protect its citizens. Government interventions are necessary in terms of authorization and registration of service providers including standardization of interest rates. Otherwise micro finance lending of micro credits is a companion in poverty alleviation and can help improve the lives of the households and communities.

The writer who has extensive experience working in microfinance institutions can be reached at mob: 0655-216950 and 0755-216950

SOURCE: THE GUARDIAN

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