Are Microfinance Organizations Empowering Entrepreneurs?

By Becky Myers, KF12, Sierra Leone

Illiteracy and a lack of basic business skills are one of the primary reasons why many economic activities fail. In Sierra Leone, illiteracy rates hover around 71% for females and 48% for males, one of the worst in the world. Basic business skills of many entrepreneurs are also largely lacking. Interviewing borrowers reveals that a majority commingle business transactions with personal activities. Many times, business transactions are tracked mentally, translating to unknown sales, expenses and, crucially, profit. Under these circumstances, it is tough to determine whether borrowers understand business growth dynamics relative to the interest costs of a loan.

Microfinance loans, to positively impact the local economy, need to invest in sustainable small businesses with a chance for innovation, scale and growth. Most microfinance organizations are focused on sustainability and profitability- constantly trying to acquire new clients and loans in order to grow. Some loans are used to smooth out cash flows in times of emergencies or for personal reasons, which can no doubt be a lifesaver for many clients. Yet, other loans are invested in businesses with little growth potential as the market is already fully saturated. Very few organizations have the time or resources to figure out how to target entrepreneurs who will help grow the local economy in the long-run. Is it possible- or even necessary- to encourage microfinance organizations to lend as effectively as possible in the goal to alleviate poverty?

Each MFI operates differently, but all can work to ensure entrepreneurs holistically have the tools to empower themselves. Ways to do this include offering business skill trainings alongside loans, targeting the ultra poor who wouldn’t otherwise have capital to start their own business or incorporating student loans, which Kiva recently launched.

At a microfinance organization in Sierra Leone, trainings are held for borrowers when a loan is initially received. Fees, penalties and the logistics of repaying the loan are covered thoroughly. Over the history of this MFI, more than 16,000 entrepreneurs have taken part in these trainings. Tapping into this deep network of entrepreneurs, most of whom are eagerly looking to grow their business, offers enormous potential. It is here that MFI’s can encourage entrepreneurs to make wise decisions for both growing their business and taking out a loan. Incorporating basic business skills into these trainings is one way to achieve this.

Equipping entrepreneurs with basic business skills can have significant long-term effects on both an entrepreneur and a microfinance organization. By encouraging entrepreneurs to record business transactions on a ongoing basis, knowledge of the business can improve dramatically. Entrepreneurs can more consciously identify profitability and trends, handle their business more professionally, and acquire tools for better decision-making. Incorporating these skills has proven to significantly increase profits, leading to higher savings and reinvestment in businesses. This can also mean less defaults and delinquencies for an MFI, as loan officers can more effectively identify growth potential and entrepreneurs pay closer attention to cash flows. Importantly, higher profits translate to improved living standards for entrepreneurs and their families, with more investment in education, healthcare and nutrition for children.

Kiva lenders have an enormous power to allocate loans to the microfinance organizations that most effectively target the poor. As lenders, understanding which MFI’s are truly empowering entrepreneurs will ultimately prove far more beneficial than solely making a loan. Alternatively, this can also incentivize other MFI’s to maximize use of their deep network, collaborate with other organizations and uncover innovative ways to achieve their social goals. While the products offered by MFI’s are arguably important, holistically empowering entrepreneurs will ultimately pay huge dividends for alleviating poverty in the future.