A Personal and Cross-cultural View of Microfinance
By: Hiwot Teshome Mamo
I was born in Ethiopia and attended high school in the Kingdom of Swaziland, a very small country located in Southern Africa. For those who have not traveled to various African countries, the difference between each region is immense. Living in the United States for almost three years and now attending Lake Forest College has expanded my cross-cultural understanding of the world. I have seen, at least on a limited basis, that the way microfinance is approached and implemented in each country is unique.
In many African countries, before asking for a loan from a family member or a friend, you have to engage in long conversations addressing the well-being of the family and the community. Whether these conversations take place over traditionally roasted and brewed coffee in Ethiopia, a stokvel community savings system in South Africa, or a phone call to your local loan officer in the United States, there are certain strategies and customs to address financial needs in different cultures. As an International Relations and Economics undergraduate student, this piques my interest in expanding microfinance to tackle poverty in developing countries; I decided to intern at Accion for this reason.
In Ethiopia, traditional microfinance has been around for many decades under the name of ekub, while here in the United States, even after twenty or more years, it remains an emerging market. In Ethiopia, it is a means of income management to individuals who cannot afford to save their money in a bank. It is also a source of capital with no interest rate where individual members of a group each give a specific amount of their own money and the total goes to one person. The process repeats itself on monthly basis. On the other hand, in the U. S. microfinance is an alternative loan program outside of modern financial institutions.
From my experience of living in and traveling around various countries in Africa, I have noticed two developmental challenges: 1) the lack of capital accumulation and 2) weaker financial institutions. Together these impediments necessitate traditional microfinance which is a system based solely on trust, not on collateral. What I saw and experienced in African countries led me to wonder, if one lives in the United States, a developed country with strong financial institutions, why would there be a need for microfinance?
As it turns out, there are disadvantages to having strong financial institutions. High interest rates, strict regulations, and residual effects of financial redlining are some of the difficulties that encumber the process for individuals with low income, little collateral or poor credit to request a loan. Trust may be a form of collateral in traditional microfinance due to its high social and socioeconomic cost; yet, here in the U. S., “trust me, I will pay you back!” will not result in the loan you require. Therefore, risk assessment and potential of success are key determinants of the loan process. These procedures make it difficult for some individuals to receive a loan. Nonprofit microfinance organizations such as Accion, are modeled after structure, regulation, and principle that are attentive to the needs of the underserved.
In most developing countries, there is a need to reform and harness the traditional microfinance system to a more modern system providing larger capital opportunities. The modern model has to be attentive to the traditional system to create a sustainable change. Structural changes have the potential to lead to growth without altering reach and sustainability; however, the hurdle loops back to the lack of capital accumulation and weaker financial institutions. With lack of capital, it is strenuous to put improved systematic changes in motion promptly; nevertheless, it can be achieved through micromentoring and education on business strategies using bottom-up approaches at low cost.
During my internship at Accion, I have recognized the importance of institutions and their role in communities in which they reside. Accion bridges the gap between entrepreneurs who lack adequate economic opportunities and for profit local financial institutions. Whether it is traditional microfinance in a small city in an African country, or Accion in the U.S., the motives and needs are the same: financial stability, female empowerment, poverty alleviation, and economic development. I look forward to seeing the growth of the microfinance industry and how it will be explored to address current global issues such as poverty and income inequality.