Oped: In a cash-strapped age, are microloans the answer?

By Peter Macharia

Millions of Kenyan borrowers continue to depend on microloans to raise the funds to grow their businesses or just stay afloat in hard times. And thanks to digital platforms, smartphones and free-moving capital among a few rich.

Microfinance was conceived as a solution to financial hurdles as a means of reliable access to loans and other financial products. But, more than 15 years since the idea caught hold, the question that perpetually dogs the sector is whether it actually works.

Microloans are small financial tools that typically cater to individuals and small businesses often excluded from traditional banking systems due to lack of collateral or credit history. Microfinance Institutions (MFIs) like Jijenge Credit, specialize in providing microloans, empowering individuals with the capital they need to pursue their dreams.

While microfinance allows people to take on reasonable small business loans safely and consistent with ethical lending practices, several factors including lack of managerial training for MSME owners and managers, inadequate finance and limited access to credit, rapid technology changes and rapidly changing laws and regulations as well as poor infrastructure and bureaucratic bottlenecks, still remain a concern for credit givers in the market.

The MSME sector’s progress is also being limited by a lack of marketing capabilities. The majority of small businesses don’t have a skillful marketing team. Absence of proper market research, using age old marketing strategies, etc., has made them weak in the prevailing market.

Unlike typical financing situations, in which the lender is primarily concerned with the borrower having enough collateral to cover the loan, many microfinance organizations focus on helping entrepreneurs succeed.

In many instances, individuals seeking credit facilities from microfinance organizations like Jijenge Credit for instance, are first required to take a basic money-management class. Lessons cover understanding interest rates, the concept of cash flow, how financing agreements and savings accounts work, how to budget, and how to manage debt.

Because many applicants can’t offer collateral, microlenders often pool borrowers together as a buffer. After receiving loans, recipients repay their debts together. Because the program’s success depends on everyone’s contributions, this creates a form of peer pressure that can help ensure repayment.

For example, if an individual is having trouble using their money to start a business, they can seek help from other group members or the loan officer. Through repayment, loan recipients begin to develop a good credit history, which allows them to get larger loans in the future.

Similarly, many fintechs like ourselves have now deployed alternative credit scoring metrics, such as data collected on customer smartphones or corporate websites, to inform credit decisions rather than just the traditional credit bureau scores.

Indeed, ‘digital-only distribution models’ that have employed machine learning algorithms today to determine alternative credit scores, have the potential to raise non-performing loan ratios.

Sector actors are finding increased borrowing costs, reduced access to credit and diminished profits are hitting bigger businesses harder than MSMEs, a segment often funded outside of traditional banks.

MSMEs – which account for 60%+ of African GDP – have benefitted from an ever-expanding and nimble fintech sector where firms are often conceived with an explicit purpose: to deliver microfinance to Africa’s hordes of underbanked MSMEs.

The writer is an economist and the CEO of Jijenge Credit Limited