Lending Squeeze in Sub-Saharan MFIs: An Escape Plan

Lending Squeeze in Sub-Saharan MFIs An Escape Plan

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Have you ever heard of lending squeeze? You might have, but today in this blog, we are going to talk about the lending squeeze in Sub-Saharan MFIs. Moreover, we will also discuss the possibilities of how sub-Saharan MFIs can escape the lending squeeze. 

We often talk about the risk associated with microfinance operations. And we do it because we have been trying to eliminate that risk for microfinance organizations for decades. If you are into microfinance operating in Sub-Saharan Africa, you must already know the challenges African MFIs face. But let us tell you, the lending squeeze in Africa possesses the greatest challenge, and it is the mother of all.

Today, small-scale lenders, especially microfinance organizations across the world, have been struggling to keep up their duty toward financial inclusion because of the lending squeeze. It is happening in Asia, the Middle East, Eastern Europe, North and South America, and everywhere. But MFIs from Sub-Saharan Africa and other parts of the continent are highly affected by it. And there are reasons, as well as escape plans.

But before we discuss the overall situation of the lending squeeze in Sub-Saharan MFIs and how to escape it, we must know what it is in detail. Besides, we should also learn how it works and how MFIs are being affected by this. So, let’s see all those one at a time.


What is Lending Squeeze in Microfinancing?

Have you ever heard of the term “lending squeeze”? If you haven’t, you should know what it is before we move on to another point. A lending squeeze is a situation where lenders don’t seem to lend easily, thinking the borrowers will default. Moreover, a lending squeeze happens when borrowers go through a financial crisis.

On the other hand, a lending squeeze also happens when the lender has credit available but tends to lend money at a high price which is often unaffordable for poor and small entrepreneurs.

The government also plays a bigger role in this situation because most financial organizations highly depend on loans from government bodies. But, in this particular situation, government organizations try to reserve more money due to the risk of banking failure. As a result, lenders often tend to dry up their funding.

Well, how does it applies to microfinance?

When it comes to microfinance, the lending squeeze is very common because it works with financially deprived people who often default due to their financial condition. In that case, MFIs face difficulties obtaining funds to lend to their newer clients. 

Moreover, MFIs depend highly on other financial organizations, including government bodies. And when there is a nationwide lending squeeze, MFIs cannot borrow funds from those sources, making it even more difficult for them.

I hope you understand what the lending squeeze is. Now let’s learn how the lending squeeze in Sub-Saharan MFIs affects the market. 

The Lending Squeeze in Sub-Saharan MFIs

Without any doubt, Sub-Saharan Africa is one of the most potential markets for microfinance operations. Moreover, this region needs more MFI initiatives than any other part of the world. However, issues like lending squeezes are making things harder for MFIs to flourish.

Among many other challenges, in Sub-Saharan Africa, the repayment rate is comparatively lower than its other counterparts. On the other hand, the risk of fraud is also eminent. Furthermore, among these nations’ governments, there is a significant lack of initiatives for financial inclusion. And the microfinance industry suffers negligence from the governments. As a result, the lending squeeze has become a major challenge for Sub-Saharan MFIs.

women working in sub-saharan africa

However, despite the challenge of the lending squeeze, the African Microfinance sector is growing rapidly.

The African microinsurance market size reached US$ 3.6 Billion in 2022. Looking forward, the market will reach US$ 5.9 Billion by 2028 with a growth rate (CAGR) of 8.8% from 2023-2028. (Source: IMARC)

Despite the high growth rate, most small-scale microlenders suffer from funding shortages due to the lending squeeze. But this could be better since a huge untapped market is shying away from the light of microfinance. And this is what we are going to discuss in the next part.

Despite the lending squeeze in Sub-Saharan MFIs, let’s see how they can escape the situation.

The Escape Plan from the Lending Squeeze in Sub-Saharan MFIs

Though the escape from the lending squeeze seems tough, with proper channels and practices, any microfinance organization can overcome the hardship. Let’s discuss that in detail without wasting any more time.

1. Diversify Funding

Have you ever fallen short of funding or struggled to release loans to your borrowers? We assume you have. But have you ever considered any possible ways to avoid that situation? Well, diversifying funds might be the best option to avoid such a situation.

Shortage of funding is one of the main reasons for the lending squeeze in Sub-Saharan MFIs. For small microfinance, some might run on personal financing but most run-on bank loans and other financial supports.

So, to get out of the lending squeeze, you can diversify your funding by tapping into alternative sources. For example, rather than having a bank as your only funding source, you might have some impact investors, social impacts bonds, crowdfunding, regulatory authority or even cooperative societies.


2. Strengthen Risk Management

Do you know why does MFIs or banks consider squeezing their lending activities? It is because of the lack of proper risk management. And we always talk about risk management in our blogs.

Risk management is one of the main challenges of microfinance operations around the world. But what is that risk? Well, in Sub-Saharan Africa, MFIs often deal with loan fraud. Borrowers often go missing after receiving the loans, and they never repay.

Considering that many MFIs create lending squeezes themselves. On the other hand, due to the national level liquidation, government bodies also fail to strengthen risk management, eventually creating a lending squeeze. However, with proper borrower evaluation, you can escape this situation. 

3. Collaboration with Other MFIs

Microfinance organizations often find it difficult to manage borrowers in distant locations, and in Sub-Saharan countries, this is a great problem. MFIs often work on a community-based system where they find many members together. But in this part of Africa, people live in small and distant communities. Moreover, it is often expensive for MFIs to run operations in such conditions. In that case, many MFIs neglect those untapped markets.

As a matter of fact, this particular problem can be dealt with a collaboration with other MFIs in the area.

On the other hand, collaboration with other MFIs can also benefit your MFI from drying up funding. It can help to pool resources and expertise, which can lead to improved operational efficiency and reduced cost. Reducing loan default is another benefit that you can gain from collaboration.

A lower repayment rate leads every MFI to a risky position, another reason for a lending squeeze. And we must say low repayment rate causes lending squeeze in Sub-Saharan MFIs more often. But if you can improve the collection efficiency of your microfinance, you can easily escape lending squeeze.

4. Innovative Financial Products

What type of products do you have? Are they innovative enough to attract new borrowers and, more importantly, investors? This is what most MFIs lack in particular, and it is another great cause of lending squeeze.

Remember one thing, in today’s competitive world, investors or borrowers are only attracted by what and how different your product is, besides how they are helping financial inclusion. Thus, you must offer something innovative to stay ahead of the competition.

But what financial products can you offer to attract investors?

Well, there are multiple options to choose from. For example, you can offer micro-insurance, micro-leasing, and micro-savings or take sustainable and green microfinance initiatives.   

In short, if you do something differently, you will surely escape financial squeeze within your organization by attracting more investors.

5. Adapt to Advanced Core Banking Solution

Do you know what else can help escape the lending squeeze in Sub-Saharan MFIs? Technology solution!

Today technology plays a great role in microfinance operation and development. A comprehensive solution can help you, onboard borrowers, organize information, analyze data and project business prospects.

A core banking solution can also help you create innovative financial products and manage risk. Similarly, it can also help you manage funding sources and improve your recollection rate. Simply, a technology solution can do many amazing works to keep your MFI ahead in the game and escape the lending squeeze in the long run.

On the other hand, technology can reduce your operation cost, which helps you increase your profit margin significantly. And the benefits of technology go on and on.

To conclude, the lending squeeze in Sub-Saharan MFIs is a major drawback. And it is resisting MFIs from succeeding in the market and financial inclusion itself. But it becomes easy to overcome if you can diversify funding, manage risks, collaborate with other MFIs and adapt to a technology solution.   

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