The role of inclusive finance
Oikocredit currently has 589 investments in microfinance organizations, totalling 80% of its current portfolio. Why is microfinance so important and how does it work? We recently spoke with Anton Simanowitz, a widely published UK academic and specialist working with Oikocredit, about the role of financial services in disadvantaged people’s lives.
Firstly, what is microfinance?
“Fundamentally, microfinance is about serving people who are excluded from mainstream financial services. Money is central to the way that almost everybody in the world lives. We all have day-to-day expenditures such as buying food, clothes, paying for heating, electricity, water or school fees. But for poor people, their income is not just small but also unpredictable. Many people often don't have the money that they need when they need it to pay for these things.
The other big need that people have is to cope with the unexpected: to pay for health treatment, to fix a leaking roof, or to restock a business after theft or fire. Microfinance can help by giving people access to the money they need at the time they need it. Many people for example don't go to a doctor because they don't have the money to pay. Access to an emergency loan, to savings, or to medical insurance can give people the money they need when they need it.
And finally, microfinance can help give people access to money to make economic investments such as starting or growing a business, buying seeds at the right time of year or paying for fertiliser. These investments can lead to a stronger business or more productive agriculture and increase income for the clients in microfinance and their families”.
There has been criticism that microfinance puts poor people into debt? How do you respond to this criticism?
“It is true that microcredit involves giving poor people loans, and a loan is a debt. The issue is whether this debt is used in a way that brings benefits or not. If the debt enables a client to increase production, pay for a medical emergency and thus safeguard their family income, then it’s a good thing.
It is really important to understand that giving a poor person a loan carries risk. It is essential that microfinance organizations are careful and ensure that clients have the capacity to repay before they are given a loan. In addition, the loans should be well designed to address the needs of the clients”.
You’ve recently returned from training microfinance practitioners. What do you want participants to take away from the course?
The key is that the social performance of microfinance is a core part of the business, and not an add-on or something that can be thought about separately. All microfinance institutions (MFIs) need to be aware of who they are reaching and who they are excluding. Access to financial services does not eliminate poverty, but it helps people manage the little money they have. By understanding the needs of the clients that microfinance organizations work with, there is much that they can do to provide a range of financial services that can meet these different needs. With the needs of clients in mind, MFIs can also look at other ways that they can add value and help their clients, for example through financial education or business training.
In addition, to be very aware that microfinance can harm as well as help. A loan is a debt and debt can be damaging. It is imperative that microfinance organizations are careful about who they lend to, how much they lend and the pressure that they put on recovering money. For example, I put a lot of emphasis on the issue of how microfinance organizations respond to clients who face unexpected hardships. Hopefully the products and services, such as savings can help clients cope, but it is also important for MFIs to restructure loans and to ensure that their staff understand and respond in a supportive manner”.