Earlier in the week I was engaged into a debate with a colleague about the role Microfinance Institutions (MFIs) can play to alleviate poverty and also have a strong impact on our national economic growth.
In our discussion, Steven said that MFIs do not significantly alleviate poverty. Quoting the latest National Bank of Rwanda figures, he said that MFIs’ combined credit delinquency in the first half of this year increased by four percent to 12 percent, which means that a number of MFIs clients are failing to honour their obligations.
His point of contention is that in some instances these “micro credit organisations” exploit the poor, making their troubles even worse by offering loans that they cannot afford to repay.
From our discussion, I realised that when one talks about MFIs, many people only think of small loans given to impoverished people to help them engage in productive activities or expand their own small business enterprises.
It’s traditionally right that typical users of MFIs are generally self-employed people engaged in small business enterprises such as farming, petty trade, shop keeping, street vending, food production etc but with a low income.
Such people hardly have access to formal finance services and are said to be financially excluded, limiting their access to credit.
However, modern MFIs in developed and developing economies offer diverse line small-scale services for their clients.
These include providing credit cards, setting up saving programmes that identify illiterate clients by a fingerprint and having audited financial standards.
These institutions are also a channel through which micro-insurance can be implement.
When government, local authorities and their strategic partners talk about tackling financial exclusion in rural areas, the focus is not only guided towards access to mainstream banking services.
It includes access to right financial advices (such as debt advice), insurance, diverse savings products, and easy-to-use cash machines by the rural population etc.
My colleague also ignored the fact that as local commercial banks struggle to shake-off their liquidity challenges, latest official consolidated statistics show that MFIs’ activity has increased by 10.4 percent in total assets, 12.7 percent in deposits and 13.5 percent in loans.
This reflects an increase investment, exposure and commercialisation of these institutions.
In terms of terms of outreach, the number of beneficiaries of financial services provided by MFIs in Rwanda increased from 685,651 as at December 31, 2008 to 722,474 as at June 30 2009.
At this rate of volatility in the financial industry, government should strongly continue to facilitate the operations of MFIs since they can be an effective development strategy to empower the private sector.
Through their continued provision of small-scale financial services to the marginalised population, MFIs can have important policy implications regarding poverty reduction, income distribution.
The Writer is a Journalist