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Microfinance Boosts Business and Sustainability in Africa

Posted by Yvonne Siu on January 25th, 2007

Yvonne Siu, IPC communications director, has contributed the following post on the changing roles of business and microfinance in Africa.

With its humble beginnings in 1976 with Muhammad Yunus in Bangladesh, the current microfinance movement has flourished into a highly visible and championed social and development phenomenon. Today, 3,100 microfinance institutions (MFIs) are in existence worldwide, and have been able to reach 100 million people living below $1/day. Indeed, MFIs such as BancoSol in Bolivia, FINCA in Uganda, and SHARE in India, just to name a few, have scaled up and expanded their reach with funding from the private sector, especially Citibank.

The appeal of microfinance rests in its effectiveness to “bank the unbanked,” in a sustainable way by offering access to credit and financial services to those excluded from formal financial markets. But most of the attention given to microfinance from the development community and the private sector so far has centered around understanding it as serving a social purpose, not an economic one.

That is beginning to change, however, as illustrated by a feature article in the New York Times last week, titled “Out of Africa: Cotton and Cash.” Increasingly, the private sector is considering the practical, and profitable, business applications of ethical and socially-responsible programs. The NYT piece traced the story of Dennis Okelo, a Ugandan cotton farmer who, thanks to profits made by selling cotton to Dunavant Enterprises, now runs a small grocery store. The article described Dunavant as a leading buyer of raw cotton from the American and African markets, which together represent more than half of the $12 billion global cotton market. In addition to buying raw materials from Africa, Dunavant is also leading the trend to help African farmers become more competitive vis-à-vis American cotton farmers.

This is interesting, considering the push from West African countries for the removal of US cotton subsidies, which they say stimulate overproduction and distort the world market for cotton, ultimately hurting rural development and poverty reduction. Those who advocate for the enhanced competitiveness of African cotton producers suggest farmers can, if helped adequately, compete and benefit from a more open global trading system.

It seems business agrees. Dunavant Enterprises has operated in Uganda and Zambia and has made its supply chain more reliable and productive by investing in training cotton farmers and extending microloans to them. In 2006, it lent $10 million to farmers, who repaid at harvest time. This makes Dunavant “the largest microfinancier in Africa.” Used for farming inputs, the loans help farmers be more productive and profitable, and some, like Mr. Okelo, have used their profits to start small entrepreneurial activities. Business-driven microfinance is profitable for Dunavant Enterprises, too, as it increases African farmers’ productivity, and ensures a stable supply of cotton in case of any fall in American production.

This is relevant given doubts on whether Congress will renew or reform the US Farm Bill in 2007. If Congress reforms the Farm Bill in such a way as to decrease the amount of support to the US’ 25,000 cotton farmers, production will decline in America, and Dunavant may find itself relying increasingly on African cotton. The company’s investment into capacity-building and microfinance in Africa is, in part, motivated by this possible scenario.

Dunavant’s micfrofinance activities highlight how development programs are being considered as necessary for sustainable business practices, to the point where they are integrated into corporate business models. No longer are they seen as harnessing market forces for a social goal; now, they are used to serve an economic goal, which in turn, has social benefits. It is a win-win situation for multinational companies, like Dunavant, and African cotton farmers, like Mr. Okelo.

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Reader Comments

It would be of interest to note in what areas (and in what percentages of said areas) Microfinance acquired by these enterprises is used.

To date I have not seen anything relating to this. There is no doubt MF helps, but I think further understanding could be gained from this knowledge. Whether the problem areas be production, marketing, technology or even transportation.

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