Banerjee and Duflo argue that micro-credits really only work for those who already have an idea of how they want to grow their business. There are many, for instance the shop-owning couple in Cica Das, who are entrepreneurs solely because they have no other options for jobs. So while it might be true to say that a large portion of the poor are “entrepreneurs”, they own small and relatively unprofitable businesses that will not be able to make enough money to be worth their time. When offered a microloan, many of these people opt out because they don’t think growing would be worth the trouble, or they do not actually want to run their business in the first place. So micro-financing isn’t for everyone in every case. Rather, these are opportunities only certain inspired individuals would benefit from taking.
Where microfinances do work, however, is with those who use their ideas and ingenuity to grow their business or manage their personal finances to become profitable. To, as Banerjee and Duflo would phrase it: “cross the hump”, which requires both personal skill and quite a lot of upfront money, something microfinancing by its very definition does not deal with. Some successful examples include Jennifer Auma, who used several different types of local ROSCAs to diversify her portfolio and use loans wisely. So for her, microfinancing works. For others like the couple in Cica Das or Ben Sedan the cow owner, the upfront costs or motivation needed to really make their situations profitable is not worth the extra labor of becoming more involved in microfinancing and taking out loans.
I agree with Banerjee and Duflo’s assessment of microfinancing. It makes logical sense that, just like in developed countries, there are some people who are built for entrepreneurship, and many who are not. Also, a general sense of stability and hope may be needed before people in extreme poverty are willing to take a look at long-term investments, which just isn’t possible in the day-to-day struggles of their current lives.
Micro-credits, for all their possible downfalls, do appear to be working in Rwanda. Beginning in its infancy in 1975, the microfinancing sector of Rwanda didn’t really grow until the late 1990s (due to donor relief funds following the genocide), and even then the success of those MFIs was marginal at best until the government stepped in to structure the unregulated system. In September of 2006, the government adopted a formal National Microfinance Policy, including a specific law (Law No. 40/2008), which in 2008 defined the National Bank of Rwanda (BNR) as the main regulator of the microfinance sector (1). The National Bank of Rwanda is now mandated to regulate and supervise MFIs through licensing, off, and on-site inspections (2). Since then, the overall number of MFIs has gone down, but this is due to restructuring into a much more organized and regulated system.
As of recently, microfinancing has seen particular success in cutting down on the number of bad loans. According to the BNR, bad loans in the sector dropped by 4.3 percentage points in the third quarter of 2017 to 8% (3). Pierre Uwizeye, the acting executive director the Association of Microfinance Institutions in Rwanda (AMIR), said the association is “currently working with stakeholders to support MFIs to acquire new software that will enable them to automate their systems and improve efficiency and transparency” (3). It would seem that Rwanda is indeed tightening its regulations on MFIs and introducing software to improve the successes of the micro financing sector, which seem to be wise decisions as microfinancing should be regulated.
Also recently, in Rwanda, AMIR is urging “key sector players to design appropriate products to improve consumer protection and reduce losses both clients and financial institutions” (4). This is to better serve their customers, who cannot afford the strictness of commercial banks, especially in rural areas. Straton Habyarimana, of SEEP Network, a non-profit organization working with AMIR, stresses that financial “institutions should design financial products that respond to the needs of each client. Banks should not think for them without consulting them” (4). This is especially true considering the number of Rwandans turning to MFIs increases as commercial banks in the country adopt a more conservative lending approach with tighter rules (5).
Reflecting critically:
The analysis seems accurate and fair in identifying the countries most off-track in terms of meeting the goals of ending extreme poverty. Before reading this I hadn’t thought about the possibility of certain developing countries having a much more successful time cutting down on poverty than others, and it would be interesting to explore reasons for those differences. I am glad to see that Rwanda is not included in this list of countries.
However, it seems a bit oversimplified to say that ending extreme poverty could be achieved by simply directing more aid to these countries. As has been discussed in previous posts, aid is not always distributed or handled correctly and while the article does point out less of a gap in the success rates of project from off-track countries and on-track ones, this doesn’t excuse the fact that there is still aid that would fail to be put to good use. A more in-depth exploration and plan would be needed, with perhaps more direct objectives, to ensure more aid is being used responsibly in the off-track countries.
Is Digital Technology Making a Difference?
Let’s take a look at a specific example to help answer such a broad question. “Digital technology” can be defined in many ways, but for microfinancing in particular this includes performance monitoring softwares (PMT), which enhance transparency and efficiency among MFIs. The software also allows easier access to credit by the rural poor, and create a center for data collection of all credit institutions at the AMIR headquarters in Kigali (3). Another benefit of the software is that it reduces operation costs, which in turn lowers interests rates, making microfinancing more affordable and accessible to those in extreme poverty. So on the whole digital technology, in the form of these PMTs, can greatly help the sector, increasing its assets by 9.5% during the third quarter of 2017 to 242.4 billion Rwandan franc. (3).
If we expand the definition of digital technology to include the rise in mobile phones and wireless internet, then these greatly improve accessibility, especially for rural villagers, to access their accounts, make transactions, and manage payment systems for their businesses. In particular, MFIs often target women due to the fact that women are the agents of change in families, meaning that whenever they have resources they use them to the benefit of their children (6). The application of these loans do not even necessarily need to be made in the interest of a specific business; often loans are taken out for family emergencies or to put their children through school (6). Digital technology, then, can not only help the microfinancing sector in general, but also improve the lives of individuals and families who, thanks to improvements in technology, can expand their business and manage their money more efficiently.
Resources:
- http://www.afr.rw/resources/publications/article/microfinance-challenge-fund-rwanda-end-of-project-evaluation
- https://www.bnr.rw/index.php?id=186
- https://www.newtimes.co.rw/section/read/226685
- https://www.newtimes.co.rw/business/why-micro-finance-institutions-must-have-consumer-protection-policies
- http://www.theeastafrican.co.ke/business/Rwandans-microlender-banks-tighten-rules/2560-4198648-sf0as3z/index.html
- https://www.techrepublic.com/article/10-things-to-know-about-how-microfinancing-is-using-tech-to-empower-global-entrepreneurs/
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