Africa Works

The award of the Nobel Peace Prize to Muhammad Yunus is much deserved, and
raises the question of whether microfinance — such a smashing success in
South Asia — is working in Africa. While it is hard to generalize of course,
in many cases microfinance projects have failed in Africa because the social
cohesion is not of the same nature as in South Asia. In short, it is easy to
welch on a debt in Africa. The social sanctions against doing so are weak
and indeed there are social norms that encourage welching (ie, free-riding).
All public-service organizations, including the NGOs, are somehow conflated
with the national government in the minds of ordinary Africans, making these
institutions fair-game for looting. This usually includes micro-finance
outfits. Microfince ought to have a larger effect on African economies, but
proponents need to think more deeply about the specific conditions in
africa, and not simply try to marry the asian experience to the african
situation. Microfinance operations in some parts of Africa are charging very
high interest-rates and behaving like banks, whose high costs are well
known. In Uganda, the government has moved to regulate microfinance
operators in an effort to bring down rates. The wider issue is
participation. Too many Africans have no access to credit and rural Africans
are especially cut off. Microfinance has the potential to remedy this
problem, however new methods of expanding credit must emerge in Africa to
address a different set of challenges.