The following paragraphs will discuss some of the features which have been identified as best practices from lessons learnt in micro-credit programmes over the last two decades. These features have been developed over the years to make micro-credit accessible and manageable for the ‘poorest of the poor’, specifically women. Furthermore, it is through these features that it is expected that women should be empowered.
Loan amounts and loan management The poor and the socio-economically vulnerable population are generally risk-averse. They prefer to borrow small amounts of money to meet a specific need, and do not like debt, lest they should lose even the few possessions that they have, in case of non-repayment. Thus, MFIs have a unique characteristic, providing very small loans, that makes them attractive to the poor and the vulnerable groups in Africa. However, in Ethiopia and in Malawi, field observations show that women who borrow these small amounts, do so only to survive a particular time period, usually an agriculture season. Discussions with MFI officers in Ethiopia revealed that women will borrow money and put it into two or three smaller investments which will range from daily to weekly income generation. This practice lasts for about four months which is the total repayment period at the end of which the borrower will return to her mainstream economic activity, in most cases farming and/ or home-based agro-processing.
In Malawi, the female entrepreneurs and petty traders investigated, undertake a similar practice.
These women were not directly engaged in agriculture production and thus their loans were meant to be used as a business investment. Again the female clients showed a risk-averse characteristic which influenced the amount they borrowed. A similar pattern was observed in that a small portion of the loan itself was set aside to service the repayments. It was also observed that in some cases the total loan amount would be used to meet an unforeseen crises in the family, thus leaving the borrower and the family poorer and more exposed to external shocks. In order to correct this situation, discussions with the female clients revealed that they would then turn towards the informal credit channels who would give her more time for repayment but at almost 100% interest rates.
The above example from Malawi highlights another issue which is observed commonly amongst the poorest of the poor borrowers, and that is the issue of fungibility. Fungibility is a greater risk to the borrower than the lender, because most lending institutions are more concerned with the repayment than what the borrower actually did with the credit. Therefore, as a group the poorest of the poor are more prone to make use of available funds where the need is the most, and it was observed that this group is also more likely to be exposed to vulnerability shocks.
This pattern of loan management and strategic use of the loan is typical of female clients who borrow very small amounts to survive, for example, an agriculture season. Field discussions with some MFIs in Ethiopia shows that at the beginning of every agriculture season, female clients have the same pattern in accessing credit and completing repayment during harvesting. Since the clients are highly risk-averse they will borrow only the amount that will get them through a critical period. They do not save from this amount and they do not generate any increased profits from investments made in their economic activities. Thus within the poverty reduction framework micro-credit delivered in this form and to groups characterised as poorest of the poor, with only small amounts accessible does not directly address the factors that are responsible for their continuous state of poverty. Micro-credit in this sense manages to alleviate the immediate risk of hunger which may result from poverty. Within the women’s empowerment framework, the microloan amount and the loan management process does not create the platform for any form of negotiation in gender roles and/ or relation change. In order for the empowerment process to occur it would have been necessary for the micro-credit to enable the generation of sustainable income and observable physical change in the household vis-à-vis health, nutrition, etc. Thus, the poverty alleviation-micro-finance and gender process, as explained by Mayoux (2000), did not occur in the cases studied in Malawi or Ethiopia.
ECONOMIC RESEARCH PAPERS NO 74 (January 2003)
Factors Impeding the Poverty Reduction Capacity of Micro-credit: Some Field Observations from Malawi and Ethiopia by Sunita Pitamber
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