Sustainable Lending: Bridging the Poverty Gap
By Emmanuel Allotey
Access to finance remains one of the largest contributors to poverty in Africa. Majority of Africans do not have formal bank accounts, or incomes that are stable enough to borrow from Financial Institutions. This anomaly is further exacerbated by disproportionate lending products skewed towards long term.
Microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses. Microloans are small loans offered over a shorter period of time, typically without providing any form of security and often without requiring a credit history. These loans provide the opportunity for the underbanked to manage their finances more effectively and take advantage of economic opportunities while managing the risks.
In East Africa, small ticket loans available through your mobile phone have revolutionised short term lending. This loan service is bridging the gap and helping poor people gain access to financial services. Microfinance in Southern Africa has not seen the same uptake as in East Africa. This can be attributed to shortage of technical skills, high costs, low levels of funding, expensive security requirements, low repayment rates and judicial bottlenecks.
The underbanked in Africa require access to short term funding at a low cost, and convenient repayment options. The introduction of such a financial product should form part of a wider agenda of financial inclusion by Financial Institutions. Financial Institutions need to recognise that access to funding remains the most crucial need of individuals to improve their economic standing. Without the willingness of Financial Institutions to innovate and offer bespoke short-term lending products, the gap between the bankable population and those that are marginalised due to their financial standing will persist.
There are partnerships on the horizon between Mobile Network Operators, traditional financial services providers e.g. Banks and Fintech companies to offer microloans around different models. Each partner will contribute a strategic element in the creation of an innovate lending solution for individuals. Mobile Network Operators have the distribution network (including mobile money agency network), Financial Institutions have the client knowledge to develop specific products and Fintech companies have the knowledge to build better credit risk models.
The ease of accessing short-term lending and a lack of comprehensive understanding around its risks can potentially do more harm than good. The path to bridging the lending gap requires collective effort between all stakeholders, to build a robust sustainable lending ecosystem that promotes financial inclusion and economic empowerment.