Poverty is abhorred all over the world and so microcredit loans are often used to increase financial development. Nigeria, with over 70 per cent of its population living below the poverty line, has many microfinance institutions. In this report, HAUWA MAHMUD KOLO examines whether microcredit is really being used to alleviate poverty.
Microcredit institutions give out monetary advances to help extremely poor people engage in successful entrepreneurship and improve their quality of life. But do these small credit loans really increase financial development and help individuals make solid monetary decisions as its supporters claim? While proponents extol the virtues of it, researchers looked for evidence to know whether it really works.
The researchers, Dean Karlan, an Economics professor at Yale University and Jonathan Zinman, an Economics professor at Dartmouth College, write in a report that appears in the June 10 issue of Science.
Karlan, says “Microfinance works but it isn’t the fairytale ending that has been sold to us.”
Karlan and Zinman conducted a 22-month study that examined how individuals make economic decisions over time and whether micro-lending policies aid economic development.
“Proponents argue microcredit mitigates market failures, spurs microenterprise growth and boosts borrowers’ well-being,”
The researchers found “micro loans increase ability to cope with risk, strengthen community ties and increase access to informal credit.”
But they also found the subjective well-being of loan awardees slightly declined.
In addition, they found that awardees reduced their overall number of business activities and those in the study did not increase investment in their businesses.
In Nigeria, microfinance institutions are springing back to business, following the reforms in the banking sector.
A microfinance expert operating with one of the licensed microfinance institutions in Nigeria, Grace Agugu confirms the research stating that there is a balanced proportion between those who invest wisely and those who lavish the microcredit loans they obtain. She speaks: “A lot of people come to obtain loans, but the ratio of those who invest well to those who do not is about 50:50.
“Nonetheless, we touch people’s lives, because we deal with people who do not earn much, we are there as a form of support for them. But in the long run, we ensure they pay back the loan irrespective of what they do.”
Agugu however relates that microfinance institutions in Nigeria do not have the strong base they require, as they are still battling with the challenge of acceptance. “People are still scared of microfinance banks due to past experiences. Also, some people have misconceptions that we are there to give free money, which isn’t the case.
“We majorly target downstream customers like traders in the market, vulnerable groups, and micro customers, because we accept savings no matter how little and we give out little loans.”
ndeed true is this research, as some Nigerians take these loans just to fund occasions and their immediate needs.
Madam Rachael Lazarus, a petty trader who sells akara (bean cakes) for a living falls into this category. She relates that she is a beneficiary of the Hasal Microfinance Institution. “When I wanted to marry my daughter off, I didn’t know where to start from, but because I had an active account with Hasal Microfinance Institution, they gave me a loan and right now, I am paying the debt off gradually.”
An expert of the Hasal Microfinance Institution, Bose Olagoke, says illiteracy affects the effectiveness of their plan. “We target the poor and low income earners and most of them are not enlightened, they don’t understand how it works.”
Olagoke explains, “We give unsecured loans ranging from N50, 000 to N500, 000, although we apply discretion where necessary. Some of them invest what they obtain from us, whereas others use the loans to cater for their immediate needs.”
However Karlan explains further, “Enterprise growth is the canonical story that the microcredit industry promotes. This isn’t to say that microcredit never produces such an impact. But it should not be seen as the singular story. We need to know more about how people actually use their loans, and we should not be judgmental if the answer is not always for investment in enterprise.
“The biggest lesson we see here is one of process, and of shedding ourselves of preconceived notions on what credit is for,” says Karlan. “People use credit for many reasons beyond business investment, and that is good.
“What we need now are more studies like this that help us understand the patterns of how credit is used, and if credit is being used to alleviate poverty, then we need further studies to learn how and when that happens.”