Of late I’ve read and heard a great deal of appreciation and acclamation for the sector of Micro-finance, more specifically Micro-credit. This new concept of lending small sums of money at low interest to people in developing countries, has helped them start of small scale businesses in an effort to improve their financial prospects. This model in theory, sounds great but there are certain negatives about it. The article I read brings forth these drawbacks of this radical new model.
The article focusses on the effect micro-credit has had in South Africa. Post apartheid (1994) micro-credit was introduced in the country with the expectations of raising income, living standards, employment etc. The result however was quite the opposite ; very few people in South Africa have a secure income stream and therefore face huge problems in trying to pay back the loans they took. They either need to take more loans to pay back the initial one or they have to sell of household assets, this therefore has caused more unemployment today than what it was during the apartheid. [1]
Also micro-credit since its inception within the country has not significantly changed anything. The growth has not been sustainable and the small scale informal businesses that existed in the black townships during apartheid are quite similar to the businesses that have opened up by the backing of micro-finance. So the question that arises is, What’s changed?
Developing further on this issue, micro-finance has created a large opportunity cost. Scare resources that could have been channeled towards SME ( Private Small and Medium size enterprises) [2] development have been given to micro-credit institutions and banks whose primary aim is to make money for themselves at the cost of South Africa’s poor citizens, and then leave the industry when they have made the profits they required.
To end, I would like to state that I am not against the concept of micro-credit, I think it is a great way to empower the poor; but it is also important to understand the negatives of this initiative so that moving forward countries can mend the mistakes that are being conducted to make a more well rounded action plan. This blog entry provides those negatives to work towards betterment, and not to discredit this initiative.
Works Cited :
[1] http://www.theguardian.com/global-development-professionals-network/2013/nov/19/microcredit-south-africa-loans-disaster
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