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

Written by: African Development Bank

Article Overview: Micro-credit for small economic activities, excluding actual agriculture production, can be considered as a ‘quick money making business’.

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

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  1.19 Building trust: Working Out of Poverty
  Recommendations for future research - Factors Impeding the Poverty Reduction Capacity of Micro-credit: Some Field Observations from Malawi and Ethiopia
  1.9 Building local development through cooperatives: Working Out of Poverty
  1.15 Building an employment agenda: Working Out of Poverty
  Abstract - Factors Impeding the Poverty Reduction Capacity of Micro-credit: Some Field Observations from Malawi and Ethiopia

Article Tags: agriculture production, application requirements, aversion, capital and interest, cdas, country environment, credit delivery, delivery mechanisms, development loan, economic activities, field staff, incentive payment, mfi, micro credit, payment basis, quick money, repayment period, repayment procedures, repayments, time clients



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