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Loan amounts and loan management: Tenets of Micro-credit for Poverty Reduction

Loan amounts and loan management: Tenets of Micro-credit for Poverty Reduction

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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African Development Bank
(Visit African's Website) The African Development Bank is the premier financial development institution of Africa, dedicated to combating poverty and improving the lives of people of the continent and engaged in the task of mobilizing resources towards the economic and social progress of its Regional Member Countries.The Bank’s s mission is to promote economic and social development through loans, equity investments, and technical assistance. The ADB is a multilateral development bank whose shareholders include 53 African countries and 24 non-African countries from the Americas, Asia, and Europe. It was established in 1964, with its headquarters in Abidjan, Côte d’Ivoire, and officially began operations in 1967.

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