Microfinance simply means the creation of funds and provision of these funds to the small scale entrepreneurs, low-income earners, unemployed, poverty stricken clients and some other interested parties. However, microfinance does not only revolve around “soft loans” (loans which do not require strict collateral and which could be paid in installments), it also includes a range of qualitative financial services such as Savings, Funds Transfer and insurance. This term, microfinance also involves the system of sustainable and effectively delivering such financial services to the poor. On a wider scale, it entails “a world where as many poor as possible have permanent access to an appropriate range of high quality financial services” (Robert, et al 2004.)
Microfinance has been in existence from time immemorial when the ancient poor people took loans from Local moneylenders and usurps, to when the Franciscan monks founded the community’s pawnshops in the fifteen centuries, to Friedrich Wilhelm’s credit Union Movement in the nineteenth century, but theoretically, the history of modern microfinance could be traced to mid-1970s when Accion International, a kind of peace corps group, diversified from construction and infrastructure projects to providing economic opportunity to the poor, which are not eligible to traditional loans. The scheme was quite successful, it provided 885 loans and recovered over 90% of it. The loans, claimed to be first modern pioneer of microcredit, generated 1,386 new jobs. (Le Monde, January 27, 2006.)
The history of microfinance is incomplete without the mention of Muhammad Yunus, a Professor of Economics, who founded the microcredit movement in Bangladesh , which later became Grameen Bank, His first loan which was $27 was from his own pocket which he lent to 42 people including a woman who made bamboo furniture, which she sold to support herself and her family. He focused on women and was able to inspire the whole world with his phenomenal success (it serves over 7 million poor Bangladeshi women at present and has given over $5 billion in loan).He won a Nobel Peace Prize for his achievement. He gave loans to groups of women and not individual, as a measure to ensure repayment, using their crafts as their collaterals. (Helms, Brigit (2006).
In Africa, institutional microfinance is relatively new, for local money lenders have always been sought when small loans are concerned. It started with NGOs and cooperatives and focused on women initially. As large as Nigeria is, it was not incorporated into her system till 2005. It did not begin in Tanzania till 1995 but has recorded an international standard success since.
Ghana Micro-finance institution network, GHAMFIN, was legally registered in August 1998, consisting of 70 both regulated and un-regulated micro-finance institutions(which includes NGOs, Rural banks and Cooperatives), serving over 26,000 clients. The network has a goal of coordinating and supporting the activities of microfinance institutions in order to promote and sustain a healthy microfinance industry in Ghana. Through training and by sensitizing government and shareholders on microfinance issues, it is fast heading towards its long-term objective of strengthening the capacity of microfinance in Ghana. (Susan Johnson and Ben Rogaly N.D. )
Effects in African Economy concerning its help on poverty:
Microfinance in Africa is more inclined towards Agriculture, since Africa herself depends solely on Agriculture apart from her oil. However, it has also helped small entrepreneurs either to expand or to start their own business. In an economy where unemployment is high, for example Ghana, which has a population of 22.1 million people with a Over 79% living on less than £1 per day, the effects of Microfinance can not be overemphasized.
Before the advent of microfinance in Africa, the poor in Africa was entangled in a vicious circle of not being eligible to traditional loans since they lack assets that could be used as collaterals and in cases where they own properties, they lack adequate title to it. Microfinance has resolved this issue by bringing to the doorsteps of many poor the opportunity of securing loan. Funds were generated by frequent contributions made by clients. This contribution which is usually daily, weekly or monthly ends up being used as loans with little interest rate.
Poverty in Africa, married with high level of illiteracy, has made traditional banking system almost impossible for many poor, but microfinance has streamlined this system into basically softloans and timely contributions. With this simplified system, the African illiterate and poor have been able to identify with microfinance . The poor are given a small amount as loan for a start, prompt repayment automatically qualifies them for another loan. Mostly, a total savings of 10% of the loan serves as qualification for loan. The Socioecomony of Ghana and Africa in general have been a lot better with this development, many previously unemployed have taken up loans in which they have used to start up their own business.
In 1989, a multi-year study in Credit with Education program was carried out by Freedom from Hunger in Bolivia and Ghana, using funds generated from the Thrasher Research Fund, with supplemental funding from the Nutrition Division of UNICEF/New York. It outcome was that a majority of 1996 participants (90%) felt that their incomes “increased greatly” since they had joined the Credit with Education program. This was due to the reduction in business cost by buying in bulk or cash since they now have access to credit. It was evident that microfinance developed entrepreneurial skill. It also had a positive effect on the nutritional intake of the citizens.
Summarily, microfinance can be said to have contributed immensely to the development of African economy, it has greatly touched the lives of beneficiaries of various loans. From the Nutrition to education (for many who erstwhile could not afford good education secured loans to pursue it).
Institutions providing microfinance
In Ghana, The Agricultural Development Bank (ADB) has been of tremendous help to the local farmers. It has outlined measures to increase microfinance credit facility to cocoa and other cash crop farmers to expand their farms in order to increase production.
The small and medium scale entrepreneurs in the Agona West and East, Awutu-Senya, Effutu and Gomoa West Districts will be enjoying the same facility to improve their businesses in line with the government’s poverty reduction strategy.
Sinapi Aba Trust (SAT)(Sinapi means Mustard seed) in Ghana has not recorded a parallel success to ADB, for it gives out loans to solidarity groups and not individual and said to have strict rules, which does not, permit using their loans to buy needed business assets, but nevertheless, it has added value to the business of beneficiaries.
The Garu Rural Bank which was set up in 1983 under Ghana’s Rural Banking provides services to some local salaried workers and some 300 group of farmers .It gives loans which are easily recovered as deductions from their salaries at source or their contribution respectively.
Several cooperative unions have also been formed, which readily give out microfinance services to its members at a relatively low interest rates. It follows the frequent contribution method too and loans are giving out on the basis of individual’s deposit. The government has recognized the positive effects of microfinance and has since been encouraging more organizations and individuals to be involved. The economy more agricultural oriented, the government has since been giving out more loans to young farmers aged between 18 and 35, which are believed to be more productive.
Today, Sinapi Aba Trust is currently serving 55,000 clients , but in a country of over 22 million this is just a start. The vision is to reach 500,000 loan clients and 750,000 saving clients by 2015. This can obviously not be compared to the success of Grameen bank, but it is a step towards the right direction. It has not directed the attention of the world towards the need of microfinance in the world, developing countries most especially. UN Secretary General Kofi Annan, and Hillary Rodham Clinton all speak about microcredit, even though the lay emphasis on women.
Robert Peck Christen, Richard Rosenberg & Veena Jayadeva. Financial institutions with a double-bottom line: implications for the future of microfinance. CGAP Occasional Paper, July 2004, pp. 2-3
500 million the poor has a microcrédit”, Le Monde, January 27, 2006
Helms, Brigit (2006). Access for All: Building Inclusive Financial Systems. Washington: The World Bank. ISBN 0821363603
“Microfinance and Poverty Reduction” by Susan Johnson and Ben Rogaly, published by Oxfam in collaboration with ACTIONAID and obtainable via firstname.lastname@example.org)
Wiegand at Freedom from Hunger – email@example.com