Microfinance and architecture for the poor?
Tariq Toffa, Cape Town Community Manager
Cape Town, 11 December 2014
Banking is an age-old industry, but banking with the poor has grown exponentially only over the last two decades into a $70 billion sector with over 200 million clients.
"Microfinance" was originally intended by its Bangladeshi Nobel prize-winning pioneer, Muhammad Yunus, to enable people to earn their way out of poverty by building up small businesses through loans at affordable interest rates. Yet only after three decades, billions of dollars of investment, and the creation of some 10,000 microfinance institutions was the first major study into its effects on poverty published by MIT in 2009. Alarmingly, it found no impact on poverty, with only two percent more new businesses being created. With similar findings in academic studies, such as those by David Roodman and Maren Duvendack, along with whistleblowers decrying exploitation and a spate of Indian debtor suicides, microfinance appears to be in a state of crisis; not a financial one (it remains a highly profitable industry), but an ethical one.
In South Africa, the microfinance sector has grown over the last decade with 41 percent of an estimated 421,000 informal credit unions or savings groups ("stokvels") now in the formal economy. Again, however, much of the loans are not used for growing small enterprises but for consumption. Set against the contentious reality of the global microfinance industry, and a local context of high household debt, rising cost of living, and high unemployment, South Africans appear to need better ways to build and maximize savings more than they need new ways to incur debt. South African microfinance—which looks set to continue its growth—must therefore consider how it might grow differently, with success defined not by high loan repayment rates but by whether loans actually transform lives.
One approach is to explore different financial models. The pooling of resources, for example, is the model adopted by the Cape Town-based housing microfinance organization called The Kuyasa Fund, where borrowers combine the loan with a government (RDP) subsidy and their own group savings, to build a formal house or improve an existing house (fig. 1: before and after). Alternatively, another model could explore how different funding sources could be directed toward small incremental projects (house additions, small businesses, etc.), which can be less financially burdensome to poor households while also allowing choice over time.
In another approach, the sector could be more attentive to the context in which impact is desired and link up with other projects and actors. Other City projects, for example, could provide city infrastructure while formal and informal financial institutions and structures can 'clip' onto these catalytic projects. South Africa's NMT networks (pedestrian/cycling routes) currently under construction, for example, which pass through residential areas (fig. 2), should actively be designed to facilitate small, local economic opportunity, resident-led densification, and public realm upgrading. This approach would not expect the poorest and most under-resourced to become savvy entrepreneurs, but actively helps to create the enabling environments which facilitate opportunity.
Organizations like Kuyasa must explore these or other approaches to fulfill the mandate "to pioneer a methodology for finding sustainable solutions to poverty." Generally, more strategic approaches should allow greater opportunities for residents and business owners, while also curbing the "tiger" (as Yunus himself put it) to a moderately-sized sector, and not creating "giant machines for indebting the poor" (as Roodman put it). But still the question remains: can this flawed sector—whose reality has caught up to its image—be salvaged through greater transparency, strict regulation, and strategic focus areas, or is it foolishness to still maintain a belief in a neoliberal market model solving poverty?
Photo credits: Fig. 1: Kuyasa; Fig. 2: Author.