Micro-finance, specifically microcredit programs are known within the sector of development and mainly in rural development as an engine in fostering economic development and in alleviating poverty. As conventional financial institution and banking system do not include poorer communities, because they require credit history or steady employment, this creates a wall among people in an already unequal setting. Hence, microcredit program is the principle of providing credit to high risky borrowers who do not have collaterals or any steady sources of income. This microcredit scheme was first initiated by Dr. Yunus in Bangladesh in the late 1970s and after four years of research on how to improve the lives of low-income households through a system of lending institution known as the Grameen Bank, which came into play in 1983.
Many studies and development agencies looked at the impact of microcredit as an engine of development, while in some areas, microcredit programs have been sources of scandal or mismanagement in countries such as South Africa or in Latin America, as Milford Bateman wrote in the Guardian (Nov 2013), calling micro-credit program as the “intensification of poverty” or sources of economic crash in western countries, mainly in the United States and its “no-limit” to microcredit and lack of monitoring and management.
Nonetheless, the success story of the Grameen Bank in Bangladesh has been the driver to expand this financial system, giving access to credit to poorer layers of society. As such, Eritrea isn’t an outcast in this sector and, in the contrary, has established a strong financial institution named the Savings and Micro-Credit Program (SMCP) as part of the development plan working in response to the vision of social justice by ensuring the good use of microcredits.
Indeed, SMCP was first introduced in the early years of independence. In fact, after a two years research starting in 1994, the SMCP was officially established in 1996 through a pilot project initiated in the Southern region, specifically in the town of Segeneiti. This pilot project was a joint collaboration between the SMCP under the umbrella of the Ministry of Local Government and its division of Eritrean Community Development Fund (ECDF) in partnership with the World Bank.
Soon after independence, the need of the population living in rural areas was significant in an environment where everything was to be built from scratch. One of them was the financial system and on how to assist these communities depending on livestock, agriculture or farming. Accordingly, SMCP came at a critical juncture by providing savings and credit services to those relatively poor and distanced from urban settings. The idea behind is to deal with the provision of services to people and through this, they can contribute to the overall economic growth of the country. “We envision our activities as part of the national development… we circulate capital within the economy and thus contribute to it…” Mr. Tafla explained.
This credit service seem to be successfully implementing in Eritrea but how does it work in practice? Who are the beneficiaries? These are some questions I had in mind when looking at microcredit program in Eritrea and I thought… what best than getting information from the Savings and Micro-Credit Program (SMCP) office in Asmara. Hence, this Thursday, the Acting Manager, Mr. Tafla Asmerom, an economist by profession, kindly received my colleague and I for a quite fruitful discussion and in today’s issue, let’s shed some light on SMCP and its auspicious financial services provided to an important segment of the Eritrean society.
Since 2002, the financial institution has had a semi-autonomous authority and is under the umbrella of the Ministry of National Development, however, budget, management and planning are in the hands of SMCP. The Ministry will be assisting the institution in case of policies or regulatory advices as well as beyond management’s capacities such as importing heavy materials or vehicles.
As stated earlier, the pilot project in Segeneiti was a success, as it was providing credit services to 1500 Eritreans in that area worth 1.3 billion birr at that time. With time, the SMCP continued to grow and spread nationwide, bureaucratic burden growing to the centralized office needed to be reformed. As such, by 2008, SMCP decentralized its office by putting presence in all six regions of the country through 20 branch offices.
With the aim of promoting the private sector in Eritrea by encouraging development and expansion of micro and small enterprises; assisting individuals and groups to increase their income generating capacity for the overall well-being of the community; the SMCP put in place a system of collective loans known as Solidarity Groups (SGs) comprising of 3, 5 or 7 people coming together to request a loan without any prerequisites and, secondly, loans to individual clients.
One may think, how does SMCP reach its clients throughout the country? In fact, all branch offices provide savings and loans through a system of Village Banks (VBs) and to enable such banks to be established; a minimum of 35 up to 105 clients need to use this VB and if the number of clients increases; a second one will be implemented. Currently, about 538 VBs are up and running nationwide.
Without a doubt, a strong system of monitoring and auditing is built within SMCP through its 70 loan officers spread throughout the country and, working at community level, allowing a direct contact between clients and enterprises. Further to this, one loan officer will have up to 1000 clients to his portfolio. Within the 58 sub-regional administrations in Eritrea, SMCP is present in 56 of them where in some areas, there might be two branches such as in the Gash Barka region. Actually, this region is today home to about 70% of total microcredits provided nationally by having for instance, two branches in the Lalay Gash subzone; one in Tokombia and one in Augaro worth total of 50 million Nakfa of outstanding balance. Indeed, as the Gash Barka region is known as the mother of agricultural development, Mr. Tafla highlighted that the beneficiaries are focusing on agriculture, farming, and livestock or irrigation farming. As such, the region is divided into two SMCP branches: (1) the Gash Barka Barentu region and its SMCP offices located in Akordet, Barentu. Shambuko, Augaro and Tokombia and; (2) the Gash Barka Tesseney region including Tesseney, Golidg and Haikota.
Most of beneficiaries are working in farming sectors and often organized into solidarity groups, which strengthens a sense of collective well-being, building trust as well as understanding the value of money, planning and savings system. Hence, about 90% of loans remain SGs ones and some of the sub-categories include Micro-Business Loan (MBL), Irrigated Agricultural Loan (IAL) and Small Seasonal Agricultural Loan (SSAL). The MBL and SSAL are loans destined to small scale activity which doesn’t not necessarily require a license such as ceramics, handicrafts activities among others. Interestingly, about 66% of clients of such loans are women. “They are very trustful and successful in their endeavors”, said Mr. Tafla. Indeed, the repayment rate is very high and most of the clients repay their loans very quickly.
In regards to individual loans, more and more this type of loans is seducing urban dwellers, particularly in the Central region with about 90% of loans being individual ones and about 200 clients within the SGs. This may be explained by the fact that place of residence may differ whereas the business location might be identical. The irrigated agricultural loan is merely an individual loan including business sectors of poultry farming, bee farming, irrigation farming or milk production among others.
The Small Business License will provide loans to licensed businesses, which are small in size and in need of boosting, growing and creating employment. In regards to individual loans, any individual who has fulfilled his national duties, who do not possess any loans from other institutions as well as proof of residency can apply for such loans and there are no limit in terms of age, followed by a feasibility study undergone by the SMCP. Nonetheless, when looking at statistics, most of borrowers remain within the 40s-60s years of age which may be explained by higher financial security.
How much might these credits be? Loans to individuals run from 30,000 Nakfa and 150,000 Nakfa in eight different loan cycles. The client can ask for as minimum as 7,000 Nakfa up to 30,000 Nakfa for their first loan and according to his/her repayment cycle and if completed as agreed upon, the client can borrow up the maximum written above. With the new financial reform, there are changes in methods of lending which may be challenging to clients living in remote areas away from banking systems. As SMCP was given privilege in terms of tax income to the Government, Mr. Tafla explained that the new banking structure makes it difficult to reach out to the most remote areas where village banks need to provide loans in cash as most clients are small peasants where accepting checks and having to travel to big cities such as going from Tokombia to Barentu makes transaction difficult and repayment of loans delayed.
To further promote the use of SGs, newcomers are given 6,000 Nakfa each in cash while current clients are given up to 20,000 Nakfa in cash to each member of the SGs which is a positive loopholes accorded by the Ministry of Finance. The interest rate of 16% remains more advantageous as its interest rate declining balance meter different from the conventional banking system of 12% interest rate at flat rate and requiring collaterals and this can be compared to an average of 24% interest rate imposed by micro finance institutions in East Africa.
As such, this year, so far about 160 million Nakfa were borrowed while 110 million Nakfa returned. As the number decreases from previous years, this can be explained by this lack of movement of money “as we deal with rural areas where there is no banking system”, he added. Surely, further infrastructure and a well-working banking system will be required in the near future to provide services to all segments of the country and facilitate the work of SMCP as known to be a successful enterprise working to alleviate the living conditions of the poorer layers of the Eritrean society. Through a working method and strategy focus on impact-related program was perceived through the high level of income registered in previous years. In number, in 2014, it provided 350 million Nakfa of loans and collected about 386,000 Nakfa, a net interest income of 50 million Nakfa. Today, SMCP is only providing loans to about 40% of its total demand.
When I asked Mr. Tafla, what is the strength of the success of SMCP? “The commitment of staff”, he replied. As the manager himself is in his mid-thirties, about 80% of total staff are from the youth group, mostly holders of degrees or diplomas from Halhale College of Business and a 50/50 gender ratio of 129 female employees out of 260. The key to success is surely the motivational salary scale as well as the provision of training to all staff, engaging young employees to grow within the enterprise through good policies of per diem, transport and travelling allowances and higher salary scales than national average. “To achieve positive results, we provide personnel benefits and a system of salary increment for each year of employment”, The Manager explained. More interestingly, the institution provide allowance paid by the institution at 7% and 5% from their salary which will be provided and when an employee leaves, he will get 12% of their salary in one month.
As an example of a well-managed and working for the wellbeing of the less fortunate makes SMCP a unique financial institution actively working in Eritrea. 2017 onwards will surely be promising and the institution aims at increasing its outreach, to be present in all villages, improving its human resources, materials and financial resources, improve the repayment rate by 5% every year, its auditing services and monitoring, to then, increase the number of beneficiaries from 54,000 in 2015 to 105,000 by 2019.