Financial dev’t models should be country-specific

Economic Forum It is estimated that the gross investment requirements of LDCs is around $600 billion and that the bulk of this can only be raised from domestic savings as foreign capital markets have not responded positively to LDCs’ investments needs, mainly due high risk premiums attached to such investments and more so due to governance issues that have characterised political economy of a number of LDCs.
World Bank President Robert Zoellick.
World Bank President Robert Zoellick.

Economic Forum

It is estimated that the gross investment requirements of LDCs is around $600 billion and that the bulk of this can only be raised from domestic savings as foreign capital markets have not responded positively to LDCs’ investments needs, mainly due high risk premiums attached to such investments and more so due to governance issues that have characterised political economy of a number of LDCs.

This is even more apparent given that a number of LDCs have for sometime now been faced with both internal and external debt problems. Thus high domestic savings and efficient channelling of resources into productive equity investments are a pre-condition for accelerated economic growth. There is no other known means by which growth and thus development can be attained so far.

However, faced with such a daunting financial scenario among LDCs, The World Development Report of 1989 endorses the causality relationship between financial development and economic development World Bank (1989:40). It emphasises that the central role of finance in development can be appreciated by reviewing the evolution of financial systems since pre-industrial times.

This endorsement is not surprising considering that the World Bank has made financial reforms a precondition for further funding of development projects in many LCDs. Indeed it is central to major structural adjustment programmes in other African countries to accelerate financial development and in particular financial liberalisation, as engines for growth of the economies concerned.

However, these supply-leading financial development paradigms of the World Bank have been prescribed to a number of LDCs amidst a hostile social, cultural, economic and political environment: and it remains to be seen how these can successfully take root. Of particular concern is the lack of a favourable legal and regulatory framework that might otherwise have facilitated such development.

Developing an efficient and an effective financial system takes time and prudent economic policies. These are yet to be put in place in many LDCs, and no wonder then that, they failed to identify the missing links to their development. Even financial reforms in European countries, took such countries many years to put in place what is now evident as a sophisticated and successful European financial system.

Many studies on financial development and its role in economic development, provides ample evidence that financial development is a long-term process (e.g., Schumpeter, 1934; Shaw, 1973; Fry, 1988; Saint-Paul, 1990).

Indeed, Goldsmith (1969, 1985) have all documented the processes of financial development and/or financial deepening that took many decades in various countries which now boast sophisticated financial systems.

Building up the required infrastructure of expertise and competence necessary for the development of an efficient financial system is not a matter of replicating experiences of other countries, but rather requires the development of models of financial development which takes into account conditions attendant in LDCs, to ensure that, these are country specific.

This is more apparent given the uniqueness of conditions in almost all LDCs, which makes replication of models that have succeeded elsewhere an over simplification of reality.
Thus, development of micro finance in Rwanda, like any other financial system will take time.

What is important for now, is to ensure that, micro finance institutions developing adhere to good practice, both in financial prudence, governance as well as capacity building. Government will certainly have to have a hand in this process especially at this nascent stage of their development if we are to avoid financial distress that these institutions may cause to our young financial systems if there was a fundamental financial problem with our microfinance institutions.

Nonetheless, the resent measure by the government to provide credit lines, guarantee schemes, and capacity building support to MFIs should be welcomed by all in this industry, as this will enable them meet critical challenges MFIs in Rwanda have faced for some time now, and places them in a better position to provide credit to the poor of the poor more so given that, these measures are designed to encourage MFIs to increase their presence in rural Rwanda.

Microfinance, defined as ‘a world in which as many poor and near poor household as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance and fund transfers” can be, and should a panacea to the financial needs of the poor, if only this industry is given more weight both in polity as well as civil society.

But, the country will have first of all, marshal general consensus that, this a critical industry for the development of the poor, and also that, it has to be structured to inter-face with the mainstream financial system. There should be an institutional frame work that oversees its operations and guide its activities for it to serve the purpose for which it is traditionally intended.

This is so if one considers that, it is a specialized industry that unlike the mainstream financial systems that deals in high value transactions and neglect the delivery of service to households with limited means even though these comprise the majority of our population, on account that’ the poor have no collateral securities to raise bank credit, and also that is costly to manage numerous small loans given to the poor.

However, microfinance institutions in Rwanda should embrace the best practice, where they finance their loans through savings accounts held in these institutions by the same borrowers so as to help the poor manage their myriad risks as well as ensuring that such borrowers are party to the risk inherent in the loan their acquire.

The common practice where microfinance institutions raise capital from other sources to lend to the poor, is not only a bad practice, but is also not a prudent and unsustainable. Studies done on the most successful micro finance institution (eg the Grameen Bank of Bangladesh) found out that, for every $1 they were lending to clients to finance rural non-farm micro enterprise, about $ 2.5 came from their clients’ savings.

Moreover, by promising credit to the poor, microfinance institutions will promote a culture of savings, and indeed safe savings methods. Studies done recently in Uganda have shown that, informal methods of savings are unsafe, and that those who save in informal sector risk lose up to a quarter of their savings. Thus, microfinance institutions should provide, a safe, flexible place for the poor to save money, and withdraw it when needed, which is critical to the management of household and family risks.

As pointed out earlier, the development of microfinance in Africa lags behind other regions, and yet Africa has the highest numbers of the poor. Studies available show that, Africa has 27 million accounts (Rwanda has 600,000 accounts) of the total 665 million accounts world wide representing only 4% of world distribution of microfinance institutions.

Asia accounts for 70% and Latin America 20% and the balance in the rest of the world. Overall, microfinance have advanced US$ 57 billion in loans and mobilized US $ 15.4 billion in deposits underpinning the important role played the MFIs in financing of the poor. With regard to our country, it would important to structure MFIs operations to avoid overlapping loan portfolios which these MFIs do not have the capacity to manage.

Thus for instance licensing of these MFIs should be such that, those engaged in rural-agricultural finance are distinguished from those that finance trade. Currently, they have a milliard of loan portfolio from trade, agricultural finance, housing finance, motor vehicle purchase schemes, name it. One wonders where they get the necessary milliard expertise to evaluate the viability, riskness and management of such milliard portfolio.


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