Is Microfinancing an Effective Strategy in Africa?


Many people in Africa, especially in sub-Saharan Africa, battle poverty on a daily basis. Even in wealthier African countries, the extreme dichotomy between the economical class structures is incredibly apparent that it has created a sad and appalling portrayal of the overall poverty figures for the entire continent. With many initiatives in tacked to alleviate the poverty problem in Africa, Microfinancing has become one of the biggest institutions in battling for economic equity.

So what is Microfinancing? How does it help?

Microfinancing aims to strengthen income flow of the poor by providing financial funds to small businesses and budding entrepreneurs to start and develop their ideas into full fledge businesses. These types of financial services provide the necessary financial capital to various clients who are unable to access banking or related services for their business goals. Oftentimes, especially in Africa, microfinance is used primarily to supply financial services to low-income and under-resourced clients in hopes give them the financial opportunity to grow and thrive within the business market. Over the past years, the growth and popularity of microfinance in Africa has taken a remarkable interest. According to the United Nations, there was more than 1300% expansion for the microfinance industry from 2000 to 2012. Even with such growth, the question still remains. Is Microfinancing an effective solution in the fight against poverty?

(Learn about the history of Microfinance in this TedTalks here.)

For the supporters of microfinance, they believe that the African poverty levels stems from low saving rates and poor capital accumulation from local businesses, especially in under-resourced and under-represented areas. This in turn led to the concept of providing accessible loans to help increase savings and financial service to run and operate various businesses. For stories like Bertha Nzabanita, a Rwandan survivor, widow, and single mother, this type of aid from Musasa, a microfinance firm funded by Root Capital, gave her coffee operation the stability it needed to help increase their income. While there are other notable hallmark stories of Microfinancing that improved the finances and living standards of many individuals, microfinance has also failed to replicate its success in other cities and countries.

In an inspiring article by Aneel Karnani, she states that Microfinancing does not cure poverty, stable jobs do. For her, she believes that the investment for Microfinancing provides only a small fraction of what it can potentially do. With such varying outcomes of Microfinancing, economic experts have also looked at the political, governmental, and cultural/regional influences that oftentimes impact its success rate. One of the more damaging effects Aneel highlights in her article is the increase debt a person can accrue because of these Microfinancing loans. This counterintuitive solution for her does not solve the problem, but only exacerbates it with higher economical problems.

Regardless, the overall concept of Microfinancing is great, if properly implemented. Similar to any loan, there are risk. While this idea is not ideal in providing the most viable solution to liberate the poor from its financial constraint, it does give a large number of individuals the opportunity to grow and develop personally and professionally. To improve this, I believe that Africa needs to take the microfinance model and utilize it through professional developments that educate and empower their clients with a stronger and strategic financial plan. This will be the only way to improve our fight for economic equity.