The Financial Donut Hole

20 February 2011 at 04:00 4 comments

The other day I took a shared taxi home from work in Freetown, which costs about US$0.20. The driver asked me what I was doing here in Sierra Leone. When I replied “Microcredit,” he said, “Ah, that is for women.”

He’s right – the microfinance industry has focused most of its resources on poor women because they are especially affected by poverty, and empowering women can bring about positive changes in their families and communities. At one of the organizations I’m working with over 99% of their loans are to women.

I told the taxi driver that in spite of this focus on women, some men get microloans as well. So he asked me if he could get a loan to purchase his own taxi. This presented another problem – Kiva has a limit of US$1200 for individual loans, which might buy a motorcycle, but not a car. Kiva and other microfinance organizations have limits like this to help target their efforts to the poorest of the poor.

I explained this limit to him and suggested that he might get a loan from a traditional bank. “Banks are only for rich people,” he said. In addition, he wouldn’t have the required collateral for a bank loan.

So this taxi driver is stuck in a financial donut hole – too poor for a loan from a bank, and yet too wealthy for microcredit. Clearly there are still opportunities to better serve the broader financial landscape.

By David McNeill, KF14 Sierra Leone

A shared taxi in Sierra Leone

Entry filed under: Africa, KF14 (Kiva Fellows 14th Class), Sierra Leone. Tags: , , , , , , , , , , .

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  • […] Tejal Desai, KF16, Sierra Leone Earlier this year, a Kiva fellow in KF14, David McNeill, wrote about his interaction with a Sierra Leonean taxi driver, and addressed a hot issue in microfinance: the financial donut hole. The driver asked David what […]

  • 2. Ian  |  23 February 2011 at 10:45

    Having lived most of my life in Africa I wonder sometimes if some of the loans are actually big enough to make a noticeable difference? Certain sectors of the economy such as transport would definitely require bigger loans. Transport is definitely something that in parts of Africa is very lacking. If the agencies would take more of a risk with proven entrepreneurs this could help. Alternatively, the higher loan amounts (possibly higher risk) could be put to KIVA lenders to decide if they are willing to lend before a loan is made from the agency themselves to entrepreur.

  • 3. Nick Hamilton  |  22 February 2011 at 06:04

    This is something I constantly thought about during my last placement, David. Are the loans actually big enough to make a noticeable difference? If they were bigger, and the borrower got it right, wouldn’t they be in a far better position?

    I often thought that my MFI should take more of a risk with the most promising entrepreneurs who have consistently paid back on time. Easy for me to say, though, when it’s not my P&L.

  • […] The Financial Donut Hole Country: Sierra Leone / Fellow: David McNeill (KF14) Where do entrepreneurs go for financing if microloans are too small and bank loans are unattainable? David’s conversation with a taxi driver in Freetown illustrates this conundrum perfectly. […]

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