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Microfinance in Africa – a call for greater transparency

The microfinance world has lately been receiving a series of negative PR, including the recent squabble in Bangladesh involving the Nobel Prize Laureate, Muhammad Yunus.

Muhammad Yunus won the Nobel Prize in 2006 because of his work at Grameen Bank, a microfinance bank in Bangladesh which he founded. The Bangladeshi government, a shareholder in the bank, recently forced him to resign as the managing director of the organisation. While the bank claims that his forced resignation is as a result of him being beyond his retirement age of 60, others believe it is due to political forces.

It seems like the industry is taking steps backwards and manifesting the views of its naysayers. However, there is a glimmer of hope in the form of a new practice referred to as pricing transparency.

Pricing transparency is an initiative which could provide some integrity to the industry, by communicating product pricing to consumers, thereby empowering them with choices amongst other things. The industry at the moment operates in an opaque pricing environment, where clients do not have sufficient information about the various loans available to them. High profit generated off the poor by charging high non-transparent prices creates a very bad public image for the microfinance industry and has resulted in a strong backlash.

It is common knowledge that the interest rates for microfinance are higher than that of the commercial finance industry. However, there is little explanation why these rates are higher and why there is significant variation in interest rates among different institutions in the industry. Another argument is that there should not be one price for all loans, as there are different borrower profiles, different types of product, all of which have different risk profiles.

In the early days of the microfinance practise, the industry was mostly run by non-governmental organisations (NGOs). Currently about 60% of the microfinance industry worldwide is run by banks and finance firms, while NGOs serve about 35% of the market. Other institutions such as credit unions serve about 5% of the market. The issue of the morality of making money from the poor has been debated frequently. The current consensus is that it is not a bad thing, but when do we realise when it has gone too far?

The idea of data sharing in a burgeoning industry like microfinance is necessary to sustain its growth and integrity. If managed properly, data sharing could promote competition and advocacy for better policies and regulations. The issue of scale in the microfinance practice has been a topical point, but it is crucial to first address the inefficiencies occurring in the sector at its current level. Data sharing would inadvertently boost competition.

On the positive side, MFTransparency, an initiative to boost the welfare of poor micro-entrepreneurs and to promote the integrity of microfinance as a poverty alleviation practice, has been endorsed in 18 countries in Africa. In this industry there is a thin line between being regarded as a loan shark and what we refer to as a microfinance organisation, and the level of transparency practiced defines this divide.

Dolapo Adejuyigbe works for a development finance think tank in Johannesburg, South Africa

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  • David

    @ FOlu, but then the concept of microfinance was created to solve poverty and financial exclusion. High interest rates (some of which are up to 70%) keep consumers indebted. You then have to ask yourself, are practitioners solving a problem or creating one. I say this with the knowledgde that b usinesses have to make a profit and hedge thenselves against risk. But as the writer says, when do we know when they have gone too far.

    Gretat article by the way!

  • folu

    Why microfinance interest rates are higher than commercial banks? Is it not because they take on riskier customers with much higher risk profiles than commercial banks with much stricter criteria? this would seem to provide an incentive for both players (the customer and the bank). I fail to see what’s wrong…

    • Naa

      I agree with you Folu. It seems the writer is trying to prejudice the discussion.

  • Joshua Kilani

    Hmmm, definitely food for thought

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