Post 5: Microfinancing in Rwanda

Microfinance (n): the lending of very small amounts of money at low interest, especially to a start-up company or self-employed person.

Since the late ’70s, microfinancing has emerged as a popular method for helping the poor achieve financial independence. The idea is that the poor often need financing or loans, but do not have access to financing from formal banking institutions or require only very small amounts of money. Thus, microfinance institutions were created, providing small loans to the poor in an effort to lift them out of poverty.

In their book Poor Economics, the authors Banerjee and Duflo discuss the pros and cons of microcredits for the poor. A microcredit can be very beneficial to a poor person if they are confronted with an emergency expense, such as a sick family member. Without some sort of savings or access to emergency money, the poor may be forced to sell part of their business or borrow money from money lenders at outrageous interest rates. Microloans have helped to relieve some of this burden from the world’s poorest people.

Microloans have also been used to help the poor expand their businesses or receive education – things that can help to lift someone out of poverty and become self-sustaining. Some economists believe that the poor are natural-born entrepreneurs; they are able to create a living from themselves even when all odds are against them. Many of the poor are self-employed, so in many cases, a microcredit may be just what they need to expand their business or bring an idea to reality.

Overall, microcredits have been shown to not only give the poor a hand up, but to also provide them with hope that their situation can improve. Those who can’t see any hope for a better life are more likely to spend money on “temptation goods,” or buying of goods that provide immediate satisfaction but aren’t necessities, even though disciplined saving could easily lift them from poverty.  In one study discussed in Poor Economics, it was found that people who received a microloan were effective in cutting down on temptation spending, as they try to save even more money to meet their goals.

However, Banerjee and Duflo also discuss some of the negatives of microfinancing. For example, they argue that most businesses owned by poor people are destined to stay small because they don’t offer a differentiated product or service from many of the other businesses owned by poor people. One example listed in the book is women selling baked goods on the streets in India. The authors write that there was a baked goods seller about every six houses selling the exact same food, making business tough for every one of them. If most of these businesses are likely to be outcompeted by similar businesses, then a few extra dollars can only go so far in helping to boost them above the rest.

In Rwanda, almost 500 microfinance banks or other institutions existed as of December 2015. However, these institutions account for only 5.9% of the total assets in Rwanda. Most of these loans were provided for trade/hospitality funding, closely followed by construction/real estate and agriculture.  In a report from called Assessment of the Rwandan Microfinance Sector Performance, the authors discuss the history and current situation of microfinancing in Rwanda.

Microfinance institutions have existed in Rwanda since 1975, but did not see much growth until after the genocide in 1994. The sector experienced huge growth as donor funds flooded into the country. Unfortunately, because the industry was largely unregulated, problems such as a weak culture of loan repayments and bad money management by banking institutions arose. Reforms of the microfinance sector were made in 1995 and 2006, resulting in the closing of many corrupt microfinance groups.

There are three basic types of microfinancers in Rwanda. First are mobile money providers, which offer ways for clients to save and carry out financial transactions with “mobile wallets.” This helps to increase the reach of banking institutions because clients can bank remotely, rather than having to travel miles to the nearest bank.  Second are microfinance institutions, which are largely comprised of SACCOs. In this case, a community comes together and each person contributes some money, offering loans/services to only its own members. Lastly, microfinance banks are formal banks that provide microfinance services with the intention to reach underprivileged groups.

sacco

The microfinance sector has grown steadily over the past three years, though the percent market share has increased at a much slower rate. While growth is expected in this sector, there is still room for improvements. The report found that rural areas in Rwanda are still underserved and see limited banking competition. The Rwanda government is planning to nationalize many of the smaller microfinance institutions into one national bank, and to expand its reach so that 90% of the population will have access to banking by 2020. Currently, 38.1% of Rwandas have a formal bank account, and 25.5% have a savings account, though most of these people likely live in more populated areas. The number of citizens in rural areas who use informal banking/savings is probably much higher.

The report details several possible areas of improvement, such as enhancing services based on client needs and strengthening staff skills to better provide for customers. Still, the authors are optimistic that the sector will continue to grow in Rwanda as expansion of banking branches, mobile banking, and ATM machines will positively impact financial inclusion in Rwanda.

Sources:
Poor Economics. Banerjee and Duflo
Assessment of the Rwandan Microfinance Sector Performance. MicroFinanza Rating, Access to Finance Rwanda, and Association of Microfinance Institutions in Rwanda.
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