ECONOMY-GUINEA: Micro-Finance, Macro Interest Rates

By Saliou Samb Reprint | | Print |

Saliou Samb

CONAKRY, May 18 2006 (IPS) - Since being introduced in Guinea in 1989, micro- credit organisations have made their mark. Take the case of Batouly Diallo.

Seated behind a table at the market in Gaoual, northern Guinea, the 45- year-old food seller is a client of Rural Credit of Guinea (Crédit rural de Guinée, CRG): one of several micro-finance institutions that operate in the West African country.

CRG provided an initial loan of about 30 dollars to Diallo, who has used funds from the organisation to increase her turnover during the past seven years.

“Since I obtained my loan at CRG, my life has changed. Today, without the help of my husband, I manage to buy my clothes and those of my children,” she told IPS.

However, high interest rates have made micro-credit organisations a less attractive proposition for others.

“You find yourself with an annual interest rate of 30 percent,” an employee of the Pride Finance micro-credit grouping, who asked for anonymity, explained to IPS.

“It’s excessive, as this means that for each loan the client is obliged to repay almost a third (of the original amount).”

The three principal micro-finance organisations in Guinea set different interest rates: 2.5 to 3.5 percent monthly at CRG, depending on the loan; from 1.2 to 2.5 percent at Yété Mali – and three percent at Pride Finance. (“Yété Mali” means “help yourself” in the local Soussou language.)

Managers of the institutions say the rates are needed to cover the personnel and logistical costs they incur.

“If we have a dispute at Nzérékoré (in southern Guinea), for example, we are obliged to send out a field agent (and) take care of him for the duration of his stay there…This necessarily implies costs,” says Macky Bah, one of the managers of Pride Finance, which is based in the capital – – Conakry.

Microfinance Gateway, an online resource centre on micro-credit, also notes that the alternative to high rates has its own pitfalls.

“The microfinance institution could subsidise the loans to make the credit more ‘affordable’ to the poor. Many do,” says an entry on the donor-funded Gateway website, which is maintained from Washington.

“However, the institution then depends on permanent subsidy. Subsidy- dependent programmes are always fighting to maintain their levels of activity against budget cuts, and seldom grow significantly.”

In addition, subsidised loans can prove relatively expensive for would- be borrowers.

“A long series of studies has shown that many programmes that charge subsidised interest rates end up using rationing mechanisms to distribute credit in response to excess demand. These mechanisms cause the borrower to have to ‘jump through hoops’, increasing the time and money s/he must put out to get the loan,” observes the Microfinance Gateway.

“In fact, these transactions costs are frequently higher than the interest costs, which takes away the advantage to the borrower of the interest rate subsidy.”

Nonetheless, high rates are said to have taken a toll on certain borrowers in Guinea.

“It is not surprising that many of my former clients went bankrupt despite their good will. With a market that is so volatile and a currency that is depreciating so rapidly, it is not easy to succeed. Today, these people are hiding, to avoid humiliation,” said the Pride Finance employee.

Between September 2000 and April 2006, the Guinean currency lost almost 100 percent of its value against the dollar and the euro – the two most popular foreign currencies in the country.

“At Pride Finance we train our clients to allow them to manage their loans better. Despite this, there are some…who find themselves crippled with debt,” says Bah, who defies conventional wisdom on the topic of subsidies.

“Sincerely, I think that the best solution is to adopt a national micro-finance strategy aimed at a real reduction in poverty. And, more must be done to subsidise the micro-credit organisations so that they do not fail.”

Francis Sagno, a manager at CRG, says his institution also has measures in place to protect against defaulters.

“There are no loans without risks, and we ask our clients to give a certain number of guarantees in kind or in cash – to cover them (in the event that they default on repayments),” he notes.

“We make inquiries (about clients) before taking a decision (on whether to extend loans).”

In addition, every client who asks for a loan pays 10 dollars for the organisation to open a file on them – whether they are poor or well-to- do.

High interest rates notwithstanding, micro-credit institutions estimate that nearly 60 percent of clients succeed in repaying their loans. Women, who invest in the sale of basic goods, do best.

And in a country where poverty is widespread, thousands have turned to these organisations for help. Traditional banking institutions have typically failed to cater for those who try to make ends meet on less than a dollar a day.