Micro-credit is a hot topic among developing countries because of its great potential to lift families out of poverty. Micro-finance Institutions (MFIs) are located all around Africa and there are several arguments for and against the micro-credit/micro-loans that these MFIs provide. The authors of Poor Economics present both sides of the argument.
If used correctly, micro-credit and small loans can help individuals and their families become quite well off. For example, the authors describe a woman, Andhra Pradesh, who has used micro-loans and trash collecting to make more money than she ever imagined. By collecting trash and selling the trash to companies that then make money by selling to recyclers, Pradesh saw opportunity for growth. The micro-loan that she received provided enough extra money to give her some breathing space. Rather than paying an additional fee to have her collected trash sorted out by the company she sold to, she made some extra money by deciding to sort it herself. With these savings, she then was able to take out additional micro-loans and grow her business exponentially from there. “By the time we met her, she was at the helm of a large network of trash collectors, no longer a collector herself but an organizer of trash collection” (Banerjee & Duflo, 2011). These impoverished entrepreneurs of the developing world who are creating small business in their towns have the greatest opportunity with micro-credit. The authors also explain how businesses of the poor have high marginal return, meaning that growing these small businesses a bit would be worthwhile.
Although it may seem worthwhile to invest in small, local businesses run by poor people, there’s also the harsh reality that, although the micro-credit may be helping a little, these businesses are tiny and barely make any money at all (Banerjee & Duflo, 2011). “…Micro-credit does not seem to lead to a radical transformation in the clients’ lives. If the businesses run by the poor are generally unprofitable, this may well explain why giving them a loan to start a new business does not lead to a drastic improvement in their welfare” (Banerjee & Duflo, 2011). The authors present the idea that sometimes the poor feel like their time, energy, and little resources available are not worth the investment if they do not have a transformative outcome. It truly requires commitment, patience, and dedication to make a business grow large with micro-loans. Banerjee and Duflo question the commitment that poor people have in investing their every cent into the development of their business.
Although there are countries in which micro-finance has been less successful than others, Liberia is one of the countries that has greatly benefited from this banking system. According to the Central Bank of Liberia’s main website, there are currently 18 registered MFIs operating in Liberia. Most of the MFIs are located in and around Monrovia, Liberia’s capital.
The African Development Bank Group published a newsletter in April 2014, highlighting the impact of micro-credit on the country and individuals of Liberia. The newsletter introduces Pauline Thomas, who aspired to be an entrepreneur during her 5-year stay in a refugee camp during the civil wars in Liberia. While she was away, she took classes and learned business fundamentals. By the time she returned to Liberia after the war, she was ready to change her life. Buying and selling used clothing was her business, but she soon realized this required much more money than she had. She was lucky enough to be eligible for a micro-loan, which she received in 2009, and she quickly become a well-known, successful businesswoman. Pauline sold an array of clothing, even wedding dresses. “Having attained a good credit standing, Pauline emerged as a credible small-medium enterprise (SME) borrower, able to take bigger loans. She received up to five loans, allowing her to travel to China to import more products and increase her profitability” (Budri, Mbonampeka & Santi, 2014). Now Pauline has enough money to send all of her four children to school and she is even starting up her own restaurant! This is just one example of someone in Liberia that has developed and become self-sufficient, using micro-loans to create opportunity for herself and her family.
A way in which this micro-finance trend is growing, is by becoming more digital. Micro-savings has become more digitally advanced with the creation of M-PESA, “M-PESA allows users to deposit money into an account linked to their cell phones and then use the cell phone to send money to other people’s accounts and to make payments” (Banerjee & Duflo, 2011). M-PESA is similar to the popular American payment app called Venmo. M-PESA is widely popular and the trend has incredible potential for the future of developing countries’ banking. The idea of incorporating technology into micro-financing for developing countries seems extremely promising and I feel that this growth will only continue.
Banerjee, A. & Duflo, E. (2011). Poor Economics.