Imperatives for the Success of Microfinance
Lindiwe Mabuza, South African High Commissioner in London1. Political will
In any given national context it is, by definition, the political choice and will of the then government to either support the growth and development of microfinance or not. It is not all governments that choose to prioritize microfinance as a poverty alleviation policy intervention.
For those that do so, because of the recognition of the exclusion of the poor by the national financial system which leads to discrimination and increased inequality and poverty, political will is paramount to the potential success of the microfinance policy intervention. Political will is the foundation to which a supporting environment is created.
The role of government in supporting the microfinance sector is to create legislation, regulations and set up development wholesale funds to support the growth and development of microfinance institutions.
2. Enabling Environment
(1) Legislation
An enabling environment is critical for the success of the microfinance sector. Most countries today are developing legislations to support and regulate the development of the microfinance sector in their respective countries. In India the government is currently consulting stakeholders on their Microfinance Act.
South Africa passed the new National Credit Act in 2006 and its regulations in 2007. The latter aims to support microfinance and minimize the exploitation of consumers in South Africa’s credit market. As the global economy, including South Africa, continues to experience the credit crunch, the National Credit Act will provide a proper and safe platform for debt management for the consumers in the South African economy.
(2) Development Finance Institutions
Apart from legislation required to create an enabling environment for the microfinance sector, the South African Government established the South African Microfinance Apex Fund with the sole purpose of being a wholesale fund for microfinance institutions. This was informed by the lack of private investments in the microfinance sector and recognition of the role of the Government to intervene in a financial sector market failure where over 4 million South Africans are defined as unbankable.
3. Donors
Donors have been leaders in supporting the microfinance institutions in the developing world. They have invested in microfinance institutions where the private sector and Government had not. The donor community has played a critical role in supporting capacity building locally and internationally by supporting local training and international exchange programs. The limitation of donor support amongst others is the size of investment. The donor community has struggled to fund the deficit gap in investments required to grow microfinance institutions into major institutions matching the operations of the banks.
4. Investment funds
The private sector has not moved into the microfinance sector at the rate required to make poverty history. This would mean billions worth of capital investments directed at the poor productive enterprise, mostly women in the rural areas of the world. There is an emergence of investment funds targeting profitable microfinance institutions. Over the years banks in some countries have ventured into microfinance and have made good profits, this has resulted in the private equity investors also gaining interest in the sector. As microfinance institutions become more profitable more investment funds, as is the case now, will invest more resources in the industry.
5. Microfinance Institutions
Microfinance institutions have been at the pinnacle of advancing the importance of microfinance for poverty alleviation. The microfinance institutions take many forms as entities. Largely, they are either banks like the Grameen Bank in Bangladesh or NGOs like the Small Enterprise Foundation in South Africa. They are at the forefront of reaching the poor in scale and depth and ensuring sustainable, efficient and profitable operations. Thus, countries that have strong and sustainable microfinance institutions reaching the poor in large numbers have a much better chance of creating wealth for the poor and alleviating poverty.
6. Enterprising Poor
In the fight against poverty everyone has a choice, role and a responsibility. The poor have as much a role to play in the fight against poverty as all other stakeholders. Microfinance to succeed also needs the enterprising poor. It needs them to trade and sell their goods so as to repay their loans and improve their family income and sustenance.
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