The Importance of Microfinance in Sub-Saharan Africa

by andrewcagle

Since Muhammad Yunus pioneered the concept of microcredit in the 1970’s, the practice of empowering the poor through small loans has only grown with time. The number of microfinance institutions has exploded in the last decade as more and more people discover it to be a sustainable and effective tool for poverty alleviation. Even the US now has a small number of micro-lending institutions. While MFIs serve communities across the globe, providing a resource for small capital and savings has no more potential than in Africa. After spending six months involved in daily microfinance operations in South Sudan, I would argue that MFIs are essential to the growth and development of communities and economies in Sub-Saharan Africa.

In observing and living among poverty in the US, Middle East, and Africa I have learned that poverty is relative, holds differences and similarities across locations, and requires an understanding of context in each situation. What I want to show here is that the need for microfinance is greater nowhere else than in Africa. The continent also possesses factors that give microfinance great potential as a socio-economic development strategy.

Entrepreneurship is what drives the economy of the world’s poor. In Africa, small businesses dominate. South Sudan has few companies, and opportunities to apply for any kind of job are almost non-existent. In Uganda, the situation is slightly better, but by and far, entrepreneurial activity is what employs the majority of citizens. According to a Gallup study in October 2011, 20% of adults in Africa plan to start a business in the next 12 months. That number is a median that includes North Africa in the polling data. In upper income nations, such as Egypt, the percentage drops to 8%. Morocco polled lowest with 3%. However, low-income African nations posted the highest numbers of adults planning to start a business. In Uganda, a staggering 40% of adults intend to put entrepreneurial plans into motion. Across Sub-Saharan nations, with the exception of Tanzania and South Africa, most poll data resided in the 20’s and 30’s of percentage points.

When compared to the world as a whole, Sub-Saharan Africa displays the greatest reliance on small business and entrepreneurship. The average for all 83 countries surveyed in Gallup’s poll was 8% for adults planning to start a business in the next 12 months. The US and Canada polled at 7%. Asia averaged 8%. The European Union and former Soviet bloc nations posted the lowest numbers at 3% and 4%. The only region that responded with a percentage point about the average besides sub-Saharan Africa was the Middle East and North Africa with 10%, half that of the region’s southern neighbors. Sub-Saharan Africa polled at +12 percentage points above the total survey sample average.

When presented with the statement, “It is easy for anyone to obtain a loan to start a business,” few respondents agreed. Uganda turned out a percentage on the high end for Sub-Saharan nations at 30%. West African nations like Sierra Leone and Burkina Faso polled at 15% and 11% respectively. A major cause for these findings has to do with the lack of banking infrastructure in undeveloped nations. Banks are only found in urban centers and are rare in rural areas. Even when banks are present, they are not a viable source for loans or savings for the poor. At Ugandan banks, it costs clients money to save. In the US, savings accounts earn interest. In Africa, most banks have fees leveraged on all accounts and ever transaction. Power outages and regular absences of Internet network are also common problems. These are issues I face regularly with the Stanbic Bank in Moyo, Uganda. In many communities, self-organized credit and savings organizations or microfinance institutions are the only resources for entrepreneurs to start and grow a business.

While Africa may have challenges offering capital to the poor in its communities, there are factors other than necessity that make entrepreneurship a good option, even when not the only option. Variables influencing the different responses across global regions can be largely grouped into state of economy, governmental regulations and red tape, wealth of society as a whole, and availability of trustworthy business partners.

In most African nations, low GDP and per capita income is a result of education and development factors that drive the need for small business ventures. The direct inverse correlation between an economy’s health and desire to start a business has already been shown. In most African nations, especially in rural areas, starting a business is simple and easy. The main obstacle is capital. Regulations, zoning laws, and red tape are almost non-existent. Where red tape does exist, it is certainly less than that of the US and European nations. In South Sudan, a business must be large or a corporate entity before coming under government scrutiny or regulation. African society also offers a wealth of available and trusted business partners. Culturally, African communities more interdependent than Western societies when it comes to family and friend support networks. “Gallup surveys in 83 countries indicate that adults who have access to a mentor are three times more likely to say they are planning to start a business (14%) than those who do not have a mentor (5%).” In Sub-Saharan Africa, 25% of respondents in the study “have a mentor and plan to start a business”. Business and investment hinges on the ability to mitigate risk. In the world of loaning capital, minimizing risk is the name of the game. The reason many MFIs working in Africa boast high repayment rates is because of a wide and available support network.

The goal of alleviating poverty and developing communities in Sub-Saharan Africa will be achieved in large part by small loans of capital. Economic capital develops existing social capital and can spread and visibly transform communities. One of the most exciting aspects of microfinance is its growing versatility as a development tool beyond funding business ventures. Matt Damon’s charity initiative, WaterCredit, brings clean water organizations, microfinance institutions, and communities together to develop community owned water and sanitation systems. In Uganda, Edify is an organization that provides loans to Christian schools that are educating impoverished children. The exciting part is that private utilities and schools are businesses that are both profitable and affordable for communities. In the US, abundant and available capital is what allows for the creation of business and new wealth. Areas of the world lacking this crucial resource will remain stagnant without it. Microfinance holds great potential for not only developing communities in Africa, but also shedding their need for Western assistance because it provides empowerment to individuals. In a region with great need that is shaking off the handicap of decades of misguided aid, microfinance is perhaps the most powerful tool for sustainable economic development.

Simon Kwogi

Seed Effect Microfinance client, Samuel Kwogi, runs a small medical clinic in South Sudan.

Gallup Studies

Microcredit Organizations