MFI structural inconsistencies and mismatch for poverty reduction: Tenets of Micro-credit for Poverty Reduction

Micro-credit for small economic activities, excluding actual agriculture production, can be considered as a ‘quick money making business’. In Malawi, for example, field data shows that a majority of the MFIs operating are internationally based. These MFIs may also have operations in other countries in the region using the same methodology and credit delivery mechanisms, with only slight variations to match the country environment. Repayments start immediately and are either made weekly or bi-monthly with a repayment period averaging four to six months. Thus the end objective of each lending operation is mainly the recovery of the capital and interest and to continue lending.

One of the other operations characteristics of MFIs is to provide training to first time clients on business development, loan application requirements and repayment procedures. Again in Malawi, evidence from the field discussions shows that many MFIs prefer to design their own training programmes and manuals. Thus, clients may have been exposed to at least two or three different training programmes over a period of time. This eventually complicates matters further for the borrowers who tend to develop an aversion to dealing with multiple MFIs. Moreover, although the training is deemed important to introduce the discipline necessary, the MFIs do not always have their own officers delivering the training. In Malawi, for example the community development agent (a field staff of the Ministry of Gender, Youth, and Community Services) is recruited on an incentive payment basis to deliver the training to the targeted groups on behalf of the MFI. These CDAs are already over-loaded because most donors make use of them in order to deliver all kinds of services to the community level. Thus a CDA may be delivering two or three different kinds of training, on different issues to different communities, the net time allocated for a particular group may be an hour a week. This eventually makes a particular micro-credit training an extended duration of about ten to twelve weeks. The result of this weakness in training delivery is that most of the time the actual credit disbursement does not match the time of need for the credit.

Both in Malawi and Ethiopia, field evidence suggests that there is a phenomenon of territorial prejudices in MFI operations. In Ethiopia the MFIs are themselves limited to a specific region by government regulation. In the case of Ethiopia, this gives a particular MFI a monopoly advantage in the region and exclusive operations rights. This has a negative impact on operations efficiency, competitiveness, and service quality for the end user clients. Discussions from Malawi revealed that about five to eight years ago, differences in micro-credit delivery strategies resulted in social inequalities and disruption. Some programmes pursued subsidised interest rates with a grace period, while others followed market interest rates and immediate repayments. Thus it affected the social cohesion in the communities because some households benefited from the cheaper loans while others had to pay more expensive charges. Although, coordination in micro-credit delivery has improved since then, field evidence reinforces the argument that MFIs in particular are not in a position to actually reduce poverty, rather they are in the business of providing finance to those who qualify.

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 To learn more about this author, visit African Development Bank's Website.

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