Microfinance: Consumer grid or moral failure?

PeoPle dance at a wedding reception. Today, if one cannot afford to host such a party, they can turn to microfinance. ( File photo)


FINANCE helps us to allocate resources efficiently. It also helps us to manage risks. That’s why we need to reform Tanzania’s financial system in order for our country to attain robust middle class income status by 2025.

Tanzania’s Micro Finances may be classified into two categories: The first was made up of not-for profit organisations and social enterprises designed to provide small loans together with skills training to small and micro entrepreneurs.

At the beginning microcredit seemed to offer credible hope to poor people who have been excluded from mainstream financial services. Thus, these early MFI’s received substantial funding from donors and ethical investors while remaining capital came from small profits MFIs’ earned from their businesses.

But with such dependency on donor funding which was dwindling steadily, questions remained on how they were going to sustain growth. The second category was made up of individuals who worked as informal lenders prior to regulatory changes.

These people created microcredit companies often named after their founders or other fancy brand names which entered into microfinance business after regulatory changes of the early 2000’s.

Since 2000 microfinance became lucrative business you did not want to miss. Microcredit successes from other countries may have also aroused the appetite among investors for the business.

For instance Indian SKS microfinance launched with seed capital of $52,000 grew to be worth billion dollars in just eight years. Therefore there was smart money to be made by betting on microfinance.

Conventionally, when chasing money nobody likes a bodaboda ride; that’s wastage of time. You want to have a seat in the rocket if you can afford, and back then, microlending was the rocket to riches.

Now, former loan sharks had seed capital both tangible assets i.e. money and intangible assets i.e. political connections and expertise (secret code of credit fraud) jumped into the bandwagon with dreams of not reducing poverty but getting windfalls.

That was the chemistry of the early MFIs; you had MFIs found by non-government organizations starving of capital and former loan sharks seeking windfalls yet promising to do very risky business which requires patience and moral purpose to pay off.

Do you know what happened? MFIs started pursuing aggressive capital raising strategies: Firstly, some microfinance firms started getting loans from commercial banks with the interest rate of up to 14 per cent when added to administrative costs; they started providing expensive loans to their customers by charging exorbitant interest rates.

Secondly, some microfinance institution decided to go public. Yetu Microfinance is a good example of this; in March, 2016 the enterprise offered shares to the public through DSE’s Enterprise Growth Market.

Although it had promised lower interest rates loans to their customers as attributed to huge capital pool they now have, the real question is: will Yetu Microfinance manage to serve two masters?

One being the investor who wants growth; honey and milk, and the other being their customers who want affordable credit and patience. It’s the paradox which has never been solved by its peers; It’s the challenge if not addressed it’s going to have worrying implications to the poor.

Critics believe that such moves show that microfinance had gone overboard to become the lender but never to fight him. Some might have discovered Promised Land for the poor but his disciples want it for the rich.

Thirdly, MFI’s had to entice depositors in order to get capital. For instance two years ago a local MFI prom ised to offer 14 per cent of interest rate for customers investing one hundred million in savings account.

With such moves the agenda for microfinance institutions has become growth in order to compete effective ly with the lender but never transformation of the client. The results are obvious:

firstly, poverty reduction agenda has been jettisoned.

Secondly, skills training initiatives have been thrown out of the window.

Thirdly, aggressive loan selling strategy; unfortunately after exhausting small and micro-entrepreneurs particularly women the vampire turned to low cadre workers who continue to be ripped off through MFI’s predatory lending.

Finally, you got over-indebted clients forced to pay loans regardless of the fact that they are obviously bankrupt, in real sense by doing so you are forcing the poor to forgo necessary needs such as food, sending kids to school etc. in order to pay the junk loan.

That is how the machine invented to put “poverty in the museum” ended up doing nothing short of Judas kiss to the bottom of the pyramid; tying poor people’s hands forever.

Microcredit failure can be partly explained by consumer greed and moral failure. Human beings are very complex creatures, we want more stuff for ourselves; it’s a hardwired human psyche.

Unfortunately, we want them now but not in the future simply because the future has got a lot of uncertainties. This unrestrained desire for getting more stuff sometimes generates unbearable long-term costs.

I think financial mismanagement sometime reveals how irrational human beings are; we make a lot of stupid mistakes which some folks out there like to take advantage of.

Think of someone taking a loan for wedding or just for indulgence in drunkenness and wild parties. During my undergraduate studies I roomed with three alcoholic fellows, at some point our room looked like a liquor store filled with spirit and liquor bottles everywhere.

My roommates had Ben Franklin quote posted on the wall, saying that “Beer is living proof that God loves us and wants us to be happy.” Yes, God wants us to be happy but he too does not want our endeavor for happiness to sabotage our service for the wellbeing of ourselves, our families and our nation. So what happened to my alcoholic roommates was self sabotaging or stripping of dignity.

This became apparent when one of them had to be discontinued from college for failing to pay 500,000 tuition fees which could be paid fully using accommodation loan we were receiving from the HESLB.

That’s the classic example of high price we often pay for a bit fun. As consumers we need to cultivate culture of frugality otherwise even if the government tries to strictly regulate microfinance, informal credit system will continue dragging people to hell.

However consumer greed or moral failures is very minor factor in microfinance failure to deliver on its promise to the poor. In the current funding structure of the microfinance and financial regulatory environment, it’s very unlikely that MFIs will provide cure for poverty.

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