PDX Dad

Microfinance: What Role in Africa's Development?

Microfinance is absolutely important in Africa, however it’s not a panacea. The article highlights some of the problems recently with microfinance in India, although it seems to be more of the institutional ineffectiveness rather than the theory or practice.

Yet with African nations, you are dealing with two separate issues. First, India is a developing nation, true, but it already has many institutions in place essential for a solid development plan. Roads are getting better, ports are in place, the economy is focused on export and services. The laws — while some would say corrupt — have been established; banking and financial institutions are fully functional. Many African nations do not have these same institutions in place, and so the efficiency in returns on the investment will be less. Without adequate roads, a small business person cannot get their product to market. Without adequate banking the financing provided by the microloans may be underutilized. 

Second, India has a currently weakening currency. Some may say this is a problem, but it works well for investment purposes. A strong currency has lower interest rates and less returns on capital investment. This is the problem with many African countries and their currencies: they are overvalued in order to purchase primary and food goods on the open market. Again, the return on investment through microloans will not have the same efficiency or appeal as microloans in India or Asia.

To be sure, investment needs to start somewhere, and I think microloans are a brilliant way to jump-start a local economy. I just think people need to be realistic when it comes to expectations.