Is microfinance really meant for Western businessmen? Romanian tea trader Andrei Munteanu and Arnold Hoek, who has a motorised bicycle rental business in the Netherlands, received microcredit because other banks were not prepared to help them. But should larger amounts be given as ‘microfinance’ to such people in the rich West?

Klaas Molenaar, President of the Board of the European Microfinance Network, comments on eight video portraits made by Radio Netherlands Worldwide.

Part 2         (part 1)
 
 
After two decades building up microfinance institutions (MFIs – the organisations that arrange and provide microcredit) and concentrating intensively on their evolution, growth and sustainability, the time has come to listen to the users again.

They can tell the MFI sector what needs to be done to improve its services in the coming years; improvements which can benefit the many people who also are in need of financial assistance in order to participate actively in society.
 
Desperate
I cannot repay my loan, says the woman in India. She is desperate and wishes she had never accepted the loan. She was a poor woman who thought she could break out of poverty. But what did she do with the money that was lent to her? Should we finance risky activities with microloans when the assets procured (in her case, a cow) can easily die?
 
The beekeeper in Morocco explains that he had to repay 400 euros to an MFI over nine months for a 300-euro loan. He can repay it. But is this a fair price?

The same is true for the entrepreneur in India who cannot make repayments due to the high interest rates charged. Will this offer them a chance to compete with small enterprises which can obtain a loan from a bank for 17 percent per annum?
 
Business plan
Microloans can help people to break out of the situation they are in. Our entrepreneur in Romania producing herbal tea is a clear example, as is the owner of the Solex (motorised bicycle) business in the Netherlands. Both of them had no access to formal finance. They could set up small businesses provided they submitted a well-formulated business plan. But is microfinance intended to set up small businesses with loans ranging from 15,000 to 25,000 euros? And if such people already have significant savings to invest, why would other banks not step in? And if the MFIs are supporting such small businesses, what then are the actual differences with traditional banking?
 
The Dutch Solex businessman, who once depended on social welfare, is glad he can be active again. And the bank is happy they can assist the man, with a guarantee from the government to cover potential losses. But what is the real risk for that bank in absolute terms? What are the real reasons behind banks participating in these programmes? Do they believe in the client or are they seeking ways to show their social awareness?
 
We also see that the entrepreneur still has to wait a few weeks for a decision about his loan application, while we know that in developing countries loan decisions are taken within 24 hours. Maybe we have forgotten to study the many lessons learned abroad?

Former prisoner
Extending microloans is all about trust and confidence in people. Even in people who made mistakes earlier in life. So it is very interesting to see that a former prisoner in Indonesia can get a loan from an individual moneylender without the latter bothering much about the man's previous failings. But can we consider him a microfinance operator too? Secondly, we see that the client is prepared to accept any conditions, since he or she has no other place to go. How will we deal with such a dependency situation?

The Surinamese rice farmer is indeed hard-working and got a new chance with a microloan from a locally operating MFI. But that MFI acknowledges that rice farming alone will not be that attractive. The solution in the eyes of the MFI would be to organise the farmers to let them control more steps in the production process. But is it fair to lend money to these farmers knowing that the present benefits are too meagre to generate real – additional - income and build up a thriving business?
 
Step by step
Microfinance operators in Nicaragua, Morocco and Ghana refer to the importance of direct relations with their - prospective - clients. They claim to understand the reality, and offer services tailored to the needs of the clients. But what happens if the conditions and forms of the loan do not meet the plans of the woman in Ghana who wants to expand her tie-and-dye business? If people need a larger loan why should you require them to reach that level step by step: won’t that lead to overfinancing or underfinancing? Do the MFIs understand the reality of the clients and are their messages to the clients completely honest?
 
The answer to the question whether microfinance will still be needed in the near future will be positive. The results are impressive. People are indeed assisted and find a new way to participate in society. But amendments are needed in the way we organise our work and the decisions on which our services are based. Why must the client pay all the costs? Why, if that will eventually place him or her in a disadvantaged position compared with other actors in the market?
 
Good intentions
Why do MFIs need to offer high rates for deposits placed with them by private investors? Of course, the investors will have good intentions and will be socially motivated to finance the MFIs, but why can’t it be on terms that will eventually be better for the ultimate user too? Why do we still think in traditional terms of building up physical organisations, while nowadays IT would probably offer better, more cost-effective solutions? A critical look at our own functioning is called for, and listening to the clients will be most helpful in that process. The videos of the various dilemmas have implicitly proved that.

Do you agree or disagree with Klaas Molenaar? Let us know, post your comment for the Discussion section below.