Introduction
Microfinance is a term that refers to the provision of monetary services by small and medium size financial lending institutions to low- income earners who cannot access financial services from large and well established banks. Microfinance services were started with an aim of assisting the poor and financially unstable members of the society have good and stable access to a wide range of financial services such as savings, Insurance, soft loans and money transfer services. The low income earners especially in developing countries can now enjoy full financial services which are meant to reduce their level of poverty and uplift their living standards. Majority of people in developing countries are considerably poor. They have few or no assets to use as collateral to secure loans from banks. These people often borrow from local moneylenders at very high interest rates. This makes borrowing unaffordable to these people hence increasing poverty. In an effort to create a good financial system that will facilitate faster economic development, economic planners of developing countries have in the recent past agitated for the need of strong microfinance system that is capable of mobilizing savings and providing credit at lower interest rates and at considerable repayment period (Aghion, Armendáriz & Morduch. 2005 pp. 96-98).
The impact of microfinance institutions on local economic activities in Africa
In African continent, the need for microfinance cannot be overemphasized. Majority of the population lives below poverty line with an income of less than $ 1 a day. Most of these people are in rural areas and have no access to finance from any formal sector. The micro finance movement in Africa has been growing rapidly. Most governments have realized the importance and contribution of the microfinance sector in development of their economies as well as uplifting the standards of living of their people. There are numerous micro finance institutions providing financial services to people in rural areas as well as in slums in these countries. These institutions vary from a country to a country or from a region to a region. They assist poor households to raise income and acquire assets, through funding of development projects at low costs. These institutions are aimed at incorporating the financial needs of the poor to the financial system of the country (Adams, Dale, Douglas & Graham 1984 pp.118-119).
Due to the high level of poverty and scarcity of resources in rural areas of African countries, most activities which can be regarded as financial are not carried out using money. These people require money to carry out their daily needs just like those in developed countries. Their needs range from lifecycle needs, personal emergencies, investment opportunities and disasters. They require money for education, old age security and occasions such as weddings and childbirth. They need to cater for disasters such as wars, fires, floods and adverse weather conditions. They also require provisions for emergencies such as sickness, injury, unemployment or death. They require accumulation of capital through involvement in investment opportunities such as starting or expanding business and buying of assets. These people rarely meet these requirements resulting to deplorable living conditions and perpetuating of poverty. The microfinance industry tries to assist these people meet these demands. In most cases people do not have monetary resources when faced by a need. They often result to borrowing. In Africa, borrowing from commercial banks is not only costly but also unavailable to the rural poor especially for unsecured loans. The only option is to borrow from a micro finance institution. These institutions provide savings where the poor people are able to save little by little and hence accumulate enough resources that can enable one acquire credit. This also assists these institutions fund their customers’ loans from the accumulated savings fund (Branch, Brian & Klaehn 2002. p. 144).
Most of the African countries especially those in the sub-Saharan region are agriculture oriented economies. The main activities in these countries involve growing of crops and keeping of animals. Majority of the rural poor practice subsistence crop production practices which yields poor quality and low quantity produce. Besides provision of loans, the micro finance institutions has embarked on activities aimed at educating these communities on intensive food production practices with an aim of ensuring food security and facilitating trade to economically empower them. The institutions provide low interest loans on farm inputs such as fertilizers, seeds and agricultural tools in order to boost commercial farming and create a source of income. The also assist dairy farming by financing education seminars to dairy farmers on animal husbandly as well as funding them to acquire good quality dairy animals as well as improving the existing ones. To the extremely poor people, these institutions offer funding to a number of borrowers as a group for collective project (International Monetary Fund. 2008 pp. 96-98).
Effects of micro finance institutions by the global economic crisis in Africa
The microfinance industry especially in Africa is not without problems. These institutions are faced with various bottlenecks which have left some of these institutions in near collapse. The institutions are required to be self sufficient in that they should be able to pay for themselves. However this is not practical as majority of the people they serve are financially incapacitated. These institutions therefore must rely on donor and government subsidies which in most cases is scarce and unsure. They also lack the necessary human resource to manage and effectively run these institutions. They suffer poor regulation and deposit supervision coupled with institutional inefficiencies in terms of meeting the requirements of saving, and issuance loans to their members (Hirschland & Madeline 2007 p. 72).
The activities of the microfinance institutions have been negatively affected by the recent global economic crisis. The effect however varies from one institution to the other. This largely depends on the ways and means through which an institution acquires its resources. Most large and medium sized microfinance institutions in Africa are in form of Non-Governmental Organizations (NGOs). They depend on grants from World Bank, International Monetary Fund and developed nations. These economic institutions have been directly and negatively affected by the global economic crisis. This has resulted to a sharp drop in external funding to these Non-Governmental Organizations. Microfinance banks collect deposits from members and refinanced on market conditions (Rutherford & Stuart. 2000 p. 76).
Most microfinance institutions depend on credit and hence they face increased collateral requirements. This has increased the costs of borrowing and hence they have been forced to raise their interest rates to their borrowers. Microfinance institutions that are cooperatively organized have not been seriously affected as they finance their operations primarily from members’ deposits, locally gathered resources and interest from loans advanced to their members. The global economic crisis has resulted to a reduction of exports by the African countries. The commodity exports from these countries to the international markets have significantly reduced. Their terms of trade are unfavorable and so their balance of payment. These governments have reduced their spending and so the amount dispersed through government initiated microfinance institutions. This has reduced the flow of aids in terms of loans and grants to the poor majority in these countries thus accelerating poverty and inhibiting poverty reduction process (Helms & Brigit. 2006 p. 87).
Conclusion
Microfinance institutions play a very vital role in uplifting the quality of living standards and improving the welfare of people especially in the developing world. In developing world and Africa in particular, government institutions are characterized by massive corruption and inefficiency. They cannot be entrusted to provide efficient services in terms of resource mobilization and allocation. This has necessitated the development of the microfinance institutions independent from government manipulations to effectively and evenly distribute resources. Despite the good work done by these institutions they are currently faced with inadequate capital and financial resources due to the on going global economic crisis (Chen, Shaohua & Martin 2008 p. 89).
Reference
Adams, Dale W., Douglas H. & Graham (1984). Undermining Rural Development with Cheap Credit.. Westview Press, Boulder & London.
Aghion, Armendáriz B. & Morduch J. (2005). The Economics of Microfinance, The MIT Press, Cambridge, Massachusetts.
Branch, Brian & Klaehn J. (2002). Striking the Balance in Microfinance: A Practical Guide to Mobilizing Savings. PACT Publications, Washington.
Chen, Shaohua & Martin R. (2008). “The Developing World Is Poorer than We Thought, But No Less Successful in the Fight against Poverty.” World Bank Policy Research Working Paper 4703.
Helms & Brigit. (2006) Access for All: Building Inclusive Financial Systems. Consultative Group to Assist the Poor, Washington.
Hirschland & Madeline (2007). Savings Services for the Poor: An Operational Guide. Kumarian Press Inc., Bloomfield CT.
International Monetary Fund. (2008). World Economic Outlook: Financial Stress, Downturns, and Recoveries. Washington, DC: IMF.
Rutherford & Stuart. (2000). The Poor and Their Money. Oxford University Press, Delhi.