Part I: Microcredit; Arguments for and Against.
Microcredit is the lending of small amounts, typically with low interest rates, to low-income individuals or businesses. These loans are usually offered by formal institutions, such as micro-finance institutions (MFIs), or informal lenders. Microcredit has many advantages and disadvantages in Africa. In Poor Economics, Banerjee and Duflo explore microcredit and its ability to combat poverty. They make a few arguments for advantages of microcredit.
Microcredit was partially designed to give economic power to women and allow women to make smart decisions for their families. According to Poor Economics, Padmaja Reddy, owner of Spandana, said that microcredit allows the poor to change their ideas for the future and gives hope and possibility to building a better life. Banerjee and Duflo compared neighborhoods that had been helped by Spandana and neighborhoods with no microcredit offerings and found obvious signs of Spandana success. The neighborhoods with Spandana were more likely to have started some sort of business or wisely invested in durable goods. Those who started a business were consuming less and saving their money, which is incomparable to the reckless spending that was said to be an issue. More specifically, spending decreased on items that women had previously said they wanted to give up, such as tea, cigarettes, and alcohol (290-291).
Yet, in the same study of neighborhoods, Banerjee and Duflo also found that women were not necessarily being empowered, and there was no change in spending on health or education. Though the small loans helped small businesses and cut household spending, they did not translate into women empowerment or smarter spending habits. Another limitation of microcredit is the overwhelming disinterest in borrowing money to start a business, even when it is available. Microcredits have many more rules, regulations, and time constraints than borrowing from informal moneylenders. Microcredits come with a “zero default” clause, which often deters borrowers (320). Another drawback to micro-loans is that humans are not always rational when handed money. In 2010, because of government laws making payment collections difficult, borrowers were defaulting, and losses were racking up quickly for lenders. The government claimed the individuals did not know what they were getting into when they borrowed money; therefore, leaving lenders with no options for collection. Lastly, a very few percent of individuals qualify to take out a microcredit loan, so many households in desperate need of loans are unable to get them. Essentially, Banerjee and Duflo believe microcredit has its problems, but it is still a small but essential element in the fight against poverty.
Part II: Micro-financing and Money in Nigeria.
Micro-financing in Nigeria began in December 2005. By 2012, Nigeria had about 1000 micro-finance banks (MFBs), which are licensed by the Central Bank of Nigeria to extend credit, as well as other micro-financing services, to the public. In 2010, a study by the Enhancing Financial Innovation and Access Financial Sector Development Organization found that between 2005 and 2010 the number of Nigerians being served by a formal financial market increased from 35% to 36.3%. In 5 years, only 1.3% more Nigerians were being served by MFBs. The Central Bank of Nigeria acknowledges this shortcoming on its website and also acknowledges that 46.3% of the adult population are fully financially excluded in Nigeria. One strong indicator of microcredit improving life in Nigeria would be a decrease in poverty, but Nigeria has been reporting an increase in poverty since 1980.
Nigeria’s currency is the naira. The naira is easy exchanged with other currencies, and is used for trade.
Though things are looking bleak for Nigeria’s micro-financing programs, technology has paved a new road for them. According to allAfrica,
“Innovative digital technologies and services are enabling microfinance banks (MFBs) to scale up their activities in ways that were not possible before using the banks’ traditional distribution model, a new report by Ericsson has revealed.”
Mobile data has the ability to help hundreds of millions of individuals who were otherwise unable to connect with micro-finance banks and receive microcredit. Mobile phones eliminate the need to visit a physical bank and go through traditional transactions. This allows farmers, entrepreneurs, and any other rural-living individuals an opportunity to receive short-term loans. This extended outreach could potentially have a huge impact on the poverty levels in Nigeria.
In many parts of the world, mobile phone companies have already teamed up with banks and data analytics. They automatically check for credit risk and are able to bypass many steps usually taken to assess potential borrowers. This could even lead to a decreased lender’s risk, causing interest rates to fall and making microcredit available to more Nigerians.
Nigeria’s digital economy is slow-moving for it’s population size. Many entrepreneurs and small business owners are not taking full advantage of their online digital economy. Nigeria is the largest mobile market in Africa, which allows analytic specialists to gain information on the economy in Nigeria and develop a strategy for businesses to better serve the nation as a whole. Mobile banks and internet banking systems are currently active in Nigeria and increasing the ease at which transactions can be made. Though online banking has assisted with the emerging middle class, these advances are unhelpful for the poor in Nigeria. With little to no access to internet, these advances in technology have no effect on the poorest Nigerians and will not help with loans of any kind.
While microcredit and micro-financing in Nigeria are barely helping with the poverty issue in Nigeria, some help is better than no help. Nigeria has a rapidly increasing population and a lack of resources, jobs, and services for all of their occupants. The many NGOs and MFBs are continuously helping to change the direction Nigeria is headed, and these organizations are working daily to get microcredit to Nigerians who qualify and are working with the poor to make them eligible to qualify. The road to ending poverty is long and treacherous, but with the help of micro-financing, along with other techniques, we can fight poverty.