15/07/2024
Why Microfinance Might 🤔Not Be Your Friend for Business Growth
Microfinance institutions (MFIs) are often hailed as a lifeline for aspiring entrepreneurs, offering small loans to those who might not qualify for traditional bank loans. However, a hidden hurdle can emerge for individuals who use these loans to successfully launch their businesses.
The crux of the issue lies in MFI loan eligibility requirements. Many MFIs prioritize lending to salaried individuals with demonstrably stable income. This can be proven through payslips or employer confirmation, making it easier for them to assess creditworthiness.
Here's where the "Catch-22" arises:
Scenario 1: Employed to Entrepreneur: An individual secures a loan to start a business while still employed. As the business flourishes, they decide to pursue it full-time. However, when seeking a follow-up loan to expand or invest in equipment, their lack of employment might disqualify them, forcing them back into a job to regain loan eligibility.
Scenario 2: Job Creation vs. Loan Access: An entrepreneur employs five people, contributing positively to the economy. Despite their business's success, the entrepreneur themself might struggle to secure a loan for further growth as a business.... Ironically, the very employees they hired might qualify for loans from the same MFI due to their salaried positions.
This situation creates a barrier for self-employed individuals and business owners who rely on microloans for growth. It disincentivizes entrepreneurs from leaving stable jobs and discourages business expansion.
Written by Bhekisipho Mdluli Nyathi