Burden of microfinance to the poor

Lending by microfinance organisations is pushing the poor deeper into the poverty, a new study says.

It also faults the widely held belief that microfinance targets the poor, saying the model is designed to cherry pick the lower class.

The study by the University of Nairobi economics lecturer Joy Kiiru in collaboration with similar research done in Uganda by Flavian Zeija dismisses the notion that lending small amounts normally co-secured by a group is “a positive poverty eradication tool and potentially powerful engine of growth for the economy.”

Instead, they say, the practice may be condemning millions to abject poverty.

“The social costs at which the repayments are made are too high,” Ms Kiiru says in her paper titled Microfinance and accountability to the poor: Do we have reason to worry?

The problem, the studies say, is lack of understanding by borrowers on what the loan contract entails and exploitation by microfinance of this ignorance.

“In fact, many clients only ask where to sign because they urgently need the money. Even those who can read and write do not bother to read the documents. They never question anything,” a Uganda microfinance credit officer is quoted saying in the report.

Multiple borrowing pushing the repayment beyond the borrower’s ability to repay has also been cited as major problem.

Multiple borrowing kicks in when a borrower has difficulty repaying a loan and borrows to avoid default.

The loan then balloons, and by the time the credit bubble bursts, the borrower will have nothing left when the group decides to sell the property for default.

In some instances, borrowers are forced to sell their household goods to repay loans, and as it recently happened in Makueni, others are forced to surrender their children to the group as a form of blackmail to bring in relatives to help repay the loan.

Hailed as the saviour to the poor, the microfinance model works in simple way – it gathers many low-income earners, gets them to form a group, and then loans them small amounts of money payable over flexible periods.

It supposedly works for the poor in that it does away with the need for the collateral needed to secure normal commercial loans.

The small loans are meant to help them set up income-generating projects to enable them to earn and pull themselves out of poverty.

Acceptance by a group is said to deter entry to those deep in poverty.

“Peers in a group will not allow very poor people to join them because the poor are likely to use their loans for consumption and therefore risk default,” said Ms Kiiru.

This is so because unlike the normal commercial loan given to an individual, a microfinance loan given to a group is jointly guaranteed by all members, and default by one member has consequences for the entire group.

“This finding implies that microfinance may be useful for the better-off poor, but it is simply not an option to the poorest,” she said.