Teach a Man to Fish: The Microfinance Controversy

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We don’t always adopt the teach-a-man-to-fish philosophy. Often we find the in-between solution more attractive, like giving them a fishing rod instead.

In the world of economic development, microfinance is like the fishing rod. We’re eager to give the tools we feel will create wealth for those living in poverty, but we don’t teach them how to use those tools effectively. The data proves this isn’t just an opinion.

I was running a business workshop in an area of Nairobi called Kibera, and the number one question that people asked was “how do we get money to finance our business ideas?”

It’s a fair question and one that the microfinance industry claimed it would answer. Since the 1990s, nongovernment organizations (NGOs) and international agencies claimed that entrepreneurship is the fastest way to create enough jobs and enough income for a rapidly growing population in Sub-Saharan Africa. Africans knew this a long time ago. The evidence is in the markets and makeshift shops that are just a part of daily life or became tourist attractions (think the Masaai market in Kenya).

Africans are naturally resourceful and will find a way to turn a skill or product into something they can sell to make a living. The problem is when it’s done at unsustainable levels. Research from a recently published book shows that while business is booming in Africa, African businesses are 24% smaller in revenue and scale compared to businesses anywhere else in the world. On top of that, the chances that African businesses can grow large enough to compete in international markets is very low.

If we focused simply on the informal market, the area where people earning less than a dollar a day, microfinance is recommended as a way to borrow money to buy the equipment, pay the staff, or rent the space they need to draw more customers and grow their business much faster. Sadly, the solution that once earned its pioneers Nobel Peace Prizes and the world’s respect is now seen as a way to purposely keep people chained to poverty and abuse.

Just last year in December, world-renowned microfinance bank BRAC was caught using police officers in Sierra Leone to put women in jail for late loan payments. Full transparency: I used to work for BRAC, and remember that one of our principles for lending was to first educate borrowers on how to understand how the loans worked. So it was shocking to hear that many women in Sierra Leone claimed they never got an explanation of the loan agreements, and were surprised they had to pay back the loans at such fast rates and with high interest.

This worries me a lot given my new initiative to encourage the most vulnerable people to develop sustainable businesses. It’s not like I didn’t already have a plan to thoroughly advise my groups to avoid loans as much as they could. In an unforeseeable situation like the one with COVID-19, this advice is even more critical since the ability to pay back the loan depends so much on person-to-person sales in a physical marketplace.

But desperate times like this may lead them to ignore the advice either way. It’s this perpetual state of being so needy that keeps them vulnerable. Investors see them as too risky. Traditional banks see them as too risky. And the only institutions that get to reign in this area, who are “willing to take a risk”, put these low-income, small business owners in even more risk — physically and financially.

In an ideal world, we would see these business owners as people who have something of value to offer and will pay them a fairer price for that value. Then, there needs to be those willing to see and invest in their potential to grow. If we continue to limit them to the small markets or limited customers they currently have, or worse take advantage of them by lending them money they can’t afford to repay, they’ll never reach the level of income we see when businesses grow anywhere else. The next Uber, Amazon, Nike, etc. could be in a place like Kibera where I taught, where most people are self-taught and are building from scratch the things we take for granted (cars, clothing, theatres, etc). The question is do we believe in that potential, and are we willing to pay a decent price for that potential?

What are your thoughts?

I’d be willing to invest in small businesses, even if they are in poorer parts of Africa.

I think microfinance loans are still the best way to support small businesses in Africa.

Some points are missing in this argument…

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