Micro-credits and their impact on poor countries
The argument for micro-credits is that the poor should be saving as much as they can in order to help against any bad years in the field, an illness in the family, or they could use the saved money to start a business. Banerjee & Duflo said that the poor should save because like everybody else, they have a present and a future (p.184). The problem with poor people is that they often struggle to save money for the future. A few families in the readings mentioned that if there is money in the house, it will be spent- whether it’s on healthcare, alcohol, cigarettes, tea, etc. When a future goal seems too far away (paying for a house), it’s easier to give up on the goal and spend money on guilty pleasures. If the poor can put their money in micro-credit institutions and not keep it in the house, maybe they’d be less tempted to spend the money.
On the other hand though, giving poor people easy credit through microcredit’s is what makes it so easy for them to indulge in their momentary desires. Another argument against micro-credits is that MFIs often prey on the reckless purchasing behavior of the poor, which is unethical. It’s also expensive to open a bank account as a poor person because they’re only putting small amounts into their accounts at a given time, which the bank owners are weary of- they don’t make a profit from these accounts. The withdrawal fee for the poor to get their money out is also very expensive. Plus, poor people already have alternatives to micro-credit that work for them, why change? They form savings “clubs” with other savers, self-help groups that give loans to members out of the accumulated savings of the group, and rotating savings and credit associations (ROSCAs)
Microfinance services have existed in Namibia since the late 1990s and have not attained growth due to the lack of regulatory and policy framework, the lack of capital, and high operational costs (Mulunga, 2010). Access to financial services by the majority of the Namibians is also limited. I understand the limits of microcredits due to high operational costs. Since poor people can only make small contributions to their account, it’s expensive for banks to manage such small accounts that reduce profit. It’s also risky because poor people don’t have good credit, nor is the bank certain that the poor people will be able to pay back the loan. I don’t agree with the high withdrawal fee that poor people have to pay to get their money out though, I think that should be modified to a cheaper and reasonable amount.
The FNB bank in Namibia introduced a special savings account called FirstSave in 2014 that offers free deposits, higher interest rates and no monthly fees in a bid to encourage savings. The minister of finance said that age specific savings initiatives give parents a way to deposit and withdraw savings with their kids, which makes savings goals and delayed gratification tangible (Confidénte, 2014). I think the delayed gratification component is important since we saw in Poor Economics that people have a hard time saving money because there’s always temptation to buy things they don’t need or bills to pay. There are also banks in Namibia that have tried to decrease the problems of repaying a loan by creating joint liability. Peer monitoring seems to be an effective mechanism to enforce repayment (Mulunga, 2010).
Currently, there is some digital technology making a difference with micro-credits and handling finances. There is a paperless money product called e-Wallet that has apparently been working in Namibia. In 2015, there was around 750,000 e-Wallets of which 420,000 were active (The Namibian, 2015). e-Wallet allows for money to be sent or a payment to be made through phones. There are some sketchy things about it though. For instance, after six months of inactivity, a dormancy fee is introduced to cover costs. There is also a daily sending limit of N$2,000 and the limit to the amount of money in your e-Wallet can only be N$2,000. This means that if someone tries to send you money, it will be declined until you spend some of your money (The Namibian, 2015). But overall, e-Wallet has given Namibians access to financial services with or without a bank account, which was previously not possible.
Confidénte. (2014, March 12). FNB encourages Namibians to save money. Retrieved from: http://www.confidente.com.na/2014/03/fnb-encourages-namibians-to-save-money/
Mulunga, A. (2010, December). Factors Affecting the growth of Microfinance Institutions in Namibia. Retrieved from: http://www.academia.edu/6839256/Factors_Affecting_the_Growth_of_Microfinance_Institutions_in_Namibia
The Namibian. (2015, June 11). FNB explains how e-Wallet works. Retrieved from: http://www.namibian.com.na/index.php?id=137975&page=archive-read