Foreign Aid and Micro-entrepreneurship Microfinance Sustainability and Complementary Programs
Cross-borrowing enables clients to collect more money from various institutions without close inspection, and the number of applicants for microfinance has rocketed due to cross-borrowing. This has caused new problems for the microfinance sector. The purpose of achieving self-financial sustainability did not have a positive outcome. Because of the poor portfolios of the clients, MFIs could not demand repayment of the debts from the borrowers. Cross-borrowing also deteriorated the financial situation of the poor and trapped them in the cycle of over-indebtedness. For the borrowers who use the money to start a business, cross-borrowing allows them to collect a greater amount of budget. However, borrowers who have the ability to repay need to build a profitable business and sustain enough cash flow for paying off the loans. When borrowers use their microloans for start-ups, they put their money at the risk of investment. During the lending process, the MFIs pay little attention to the business processes of the borrowers to ensure their business operations are on the right track. If the borrowers’ businesses fail, their debt-paying ability is reduced, and they run the risk of cross-borrowing from other MFIs to cover their previous loans. This not only puts the impoverished into a worse situation of indebtedness but also harms the entire microfinance system. In 2010, more than 50 microloan borrowers in Andhra Pradesh committed suicide due to over-indebtedness caused by cross-borrowing (Rhyne, 2011).
Because of the borrowers’ inability to repay the loans, their credit decreases, and they gradually lose their chance of getting financial support. MFIs cannot sustain themselves through the low interest. The microfinance crisis is rooted in both the collapse of the MFIs and over-indebted borrowers. Therefore, to increase microfinance sustainability, donor countries should not only construct the microfinance sector in the recipient countries but also help the borrowers increase their ability to repay. 3. Complementary Projects: The Entrepreneurial Education & Regulation Improvement: One of the key elements to improve microfinance sustainability is to implement complementary projects, such as entrepreneurial education. It can be aimed at borrowers for micro-entrepreneurship. In “Education & Entrepreneurship: Implications for Contemporary Microfinance,” scholars pointed out that a low level of educational background and a lack of business training or management experience are among the top issues of start-ups (Gnegy et al, 2011). For microcredit borrowers, they have little access to entrepreneurial education and usually lack professional training in business management.
How it works
Lending them money can only provide financial support but cannot ensure proper business performance or reduce the risks. Donor countries should take the responsibility of business training for borrowers in the recipient countries, as they have better economic performance, resources and experience in professional training and generating economic growth. By providing business training to the microcredit borrowers, the MFIs can increase the possibility of success and reduce the risk of investment. The borrowers can then run their businesses with a better understanding of the markets. Successful borrowers can generate their cash flow, repay the loans, increase their credit for future loans, or even develop a larger business. Consequently, these borrowers will be better off and secure their loans. Once the clients have a better debt-paying ability, the MFIs can become self-sustainable through low interest, and the donors can use MFIs to construct economic development in the recipient countries. Complementary projects to foreign aid of microfinance are worthy investments in human capital, as they provide entrepreneurial training and education to the borrowers. Other kinds of complementary projects can involve regulation improvement, which can help construct a stable microfinance sector in recipient countries and avoid a microfinance crisis. As the borrowers improve their debt-paying ability, the MFIs can have better receipts and use this money to not only cover their own operation but also improve their regulations so that they can reach more people in need and help them better manage their finances.
At the same time, a regulation improvement program can help monitor the MFIs to reduce the chance of cross-borrowing. Also, donor countries can establish new institutions or add departments to MFIs to help track the activity of microenterprises and provide advisors or consultants for poor entrepreneurs to help them regulate their businesses better. In this sense, the donors provide not only entrepreneurial education programs and financial support to the borrowers, but also help in their business processes. Consequently, regulation improvement can help the poor grow their businesses, gain profit, and pay their debt. The overall portfolio of the borrowers in recipient countries will increase, reducing the risk of MFIs and attracting more socially responsible investment due to the growing accountability of both borrowers and MFIs. Ultimately, MFIs can sustain themselves through the interest of the loans and establish a healthier microfinance sector. One successful complementary program is illustrated by the USAID program in Lebanon, which invested in the microfinance sector with value chain development. In 2012, the United States launched the Industry Value Chain Development program (2012-2019) in Lebanon (LIVCD), intending to establish value chains to incentivize competition and increase the value of products in the fields of agriculture, thereby boosting the local economy. The program was implemented by Development Alternatives Incorporated (DAI) and provided technical assistance for training micro-entrepreneurs and farmers in advanced agricultural practices and business management (DAI, 2012).
The USAID has supported approximately 85% of the MFIs in Lebanon, including lending capital, providing training to clients, and assisting them during the business process. With the LIVCD project, the USAID has trained more than 10,000 individuals and over 8,000 farmers in technology and entrepreneurial education, thus developing 1160 micro and medium enterprises (LIVCD, 2012). Initially, the USAID provided 41.7 billion dollars to launch the project. Now, it has leveraged nearly 760 million dollars of new private sector investment in Lebanon (Wrichards, 2016). In this context, LIVCD serves as a complementary project to microfinance, offering practical training and education. It can also be viewed as a kind of investment in human capital in the recipient countries. Unlike collecting more funds from donors or commercializing the institutions to attract more clients, providing training and education to the poor alongside financial support can have a long-term benefit. By investing in human capital as a complementary project to foreign aid for microfinance, donors can bolster the capacity of poor entrepreneurs. This ensures that MFIs’ clients can develop more stable and profitable businesses and repay their loans. Plus, a profitable business can help impoverished business owners improve their living conditions and escape poverty. This way, MFIs can achieve their goal of poverty alleviation and foster social sustainability, meaning they can maintain their good reputation and gain increased support from society and donors due to their success stories.