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Microfinancing in Malawi – On the Margins of Inclusiveness

Updated: Jan 21, 2020

Microcredit, an extension of easy access financial loans mainly directed at the poor, was lauded for its potential to tackle poverty in Malawi along with other African countries and the rest of the developing world. Little has changed, if not for the worse, for many. While not the sole culpability of microfinance, gaping economic inequality and eager ultra-poverty levels are bent to continue sinking their sharp teeth on Malawi’s prospects for growth and development. In 2017, 50.7% of the country’s population was living under the global poverty line whereas 25% were in extreme poverty, according to the International Monetary Fund (IMF). The situation is dire in rural areas, where almost 60% of the population is poor, despite the impressive efforts of microfinance institutions extending loans to rural individuals and collectives.

The failure of microcredit in Malawi to propel individual, community and national development forward would be a disappointment for Mr. Muhammad Yunus, its Bengali pioneer who received the 2006 Nobel Peace Prize for it. In spite of the billions of dollars that governments, international and local microfinance institutions and philanthropists have dished out to poverty-stricken communities across the planet, the sight of enduring economic plight is not one Mr. Yunus thought he would probably witness even within his lifetime.

The mechanics of microcredit ought to have been better thought through, as its lack of potential has been about anything but the availability of dosh. A basic shortcoming has been the misunderstanding of the targeted poor. The foundation of microcredit, driven by the principle of including the poor in the financial economy, has mistakenly been an implemented idealism of handing trickles of cash into the hands of the poor and hungry with the aim to shift their mindsets from looking for what’s most immediate to entrepreneurship. Yet the poor are typically myopic and usually address more immediate than distant needs, rendering the diversion of microcredit towards food and other basic necessities other than growing a business a certain recourse.

Poverty is often intertwined with the reedy confidence microcredit lenders have in the targeted poor’s ability to really adapt to a new market-oriented occupation. The outcome of this asymmetric relationship between those in need of assistance and loan providers is the determination of a minute loan whose transformational impact on recipients goes only as far as a nice dream. Many financial inclusion development projects in Malawi have thus issued annual loans that are $50 or less to recipients to leverage business activities usually undertaken at a small scale. Most businesses have been trading in commonly-found goods in highly competitive markets, servicing local communities. So, faced with the decision, a poor, hunger-stricken household compelled to evaluate factors surrounding their desperation in order to determine whether the available income is best invested in ventures with long-term returns-to-investment vis-à-vis a meal that has desperately been sought for for weeks on end, to highlight a practical example.

This website has argued before about the recurrent conflation of trade-based businesses with entrepreneurship (click here for our 7 December 2016 article on this), leaving lenders and development program experts convinced they are making a scratch on development. Many businesses encouraged under microcredit in Malawi have shown an inclination towards low-value primary agricultural produce, basic agro-processing and the purchase of wholesale grocery products for resale in the communes of loan recipients. These loans have hardly been invested in innovation-led businesses in rural areas that would change the business acumen of recipient individuals and cooperatives. Yet the evident proliferation of microfinance companies and even a microfinance network, the Malawi Microfinance Network (MAMN), has been largely premised on the basis of meagre loan disbursements. It overlooks the diverse capabilities of the beneficiaries of microfinance projects, who may not necessarily all be cut out entrepreneurs. The obvious consequence is the misalignment of priorities that microcredit recipients will invest the funds into despite the intentions of the program.

It is clear that petite microloans that are traditionally bundled together with callous investors have not worked. And, although without an intention to upset Mr. Yunus further, the current model will not work. Across Malawi, poverty has soared just as inequality between the rich and poor. Evidence points to gurus of microfinance having profited on the sprawling of the sector, with the mushrooming of new microfinance institutions and well-paid staff who scarcely resonate with the poor people they preach to serve. Even with the best intentions, the proliferation of microlending companies (presently, twenty-six companies are members of MAMN) demonstrates the viability of lending although it does not necessarily translate into transformation of beneficiaries. In the mid-2000s, the UK-based non-governmental organization Concern Universal, through implementing livelihoods and food security programs in Dedza District, identified the microfinance gap which culminated in its establishment of the Concern Universal Microfinance Operations – later registered as CUMO Microfinance Limited – a non-profit. The perennialism of CUMO and its competitors across Malawi confirms the potential that microcredit institutions have in persisting as businesses even when their clients are destined to forever stand on shaky financial foundations.

But the nexus of inadequate microloans, inept recipients and poverty hardly concludes the challenge on which a policy solution can be devised. The greater economic system in Malawi is too inert to guarantee perseverance of micro-businesses. It spurs the emergence of business fringes dealing in homogenous products that create perfectly competitive market structures where the invisible hand commands the price, naturally crowding out high numbers of businesses because of relatively high cost structures of small businesses (in part, due to loan amortizations and the endless needs at home).

Microcredit must refocus its attention to creative ideas, and microfinance institutions need to enforce the passing of those entities that demonstrate clout to innovate and determination to persist. Attention towards the viability of business should replace the blanket focus on loan recipients which assumes any individual can operate a business. Although this may initially marginalize scores of poor people, inclusiveness can very well integrate the masses via the enterprises that microcredit builds, and so should only exploit the employment of skilled and non-skilled workers who can resultantly be decently compensated. On the margins of this process must be a government that ensures tailored social protection measures support the most vulnerable and those whose skills have to be polished before they can stand on their own feet.

Evidence and the lessons from the Malawi Farm Input Subsidy Program (FISP) clearly illustrate that it is not only cheaper for Goodall Gondwe, the country’s finance and development planning Minister, to appropriate social support to those completely unable to cater for themselves, but that providing expensive capital for these groups is a bottomless money pit that eventually marginalizes the rest of the viable economy. We reckon the political significance of these expensive handouts on the ruling elites. However, it is more rational for politicians to directly feed the extremely poor, a much cheaper option to the country for courting votes, while investing in entrepreneurial activity that will benefit not only the very same poor segment of society but the economy as a whole.

Finally, it is vital that effective regulation of microfinance institutions is done. While some like CUMO have little appetite for profit, their survival on the market depends on growth as well as managing competition. But many other similar institutions are actually for-profit. For them to succeed, it is imperative to strategize on scale economies where the capture of numerous loan seekers is a predictable solution. In light of this, the role of government must nurture the private interest in a way that protects the very poor from owing their entire livelihoods as much as their lives to microfinance companies.


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