Effectiveness of petty trader’s loan in economic growth
Petty trading has long been a means of subsistence in developing nations. These micro-enterprises offer potential for employment creation, poverty alleviation and contribute to a healthier economy. Development of this sector is hindered by its limited access to formal credit largely due to the slow pace of rural financial market development. Emergence of financial and other aid to micro-enterprises has been provided by institutions such as the World Bank, the Asian Development Bank, and International Fund for Agricultural Development, Inter-American Development Bank and the United States Agency for International Development. (Selvanvinayagam)
In Africa, these small-scale merchants represent the fastest growing segment of the labor market due to the recent economic stagnation and restructuring on the continent. Part of the restructuring is being done under the watchful eyes of the International Monetary Fund (IMF) and the World Bank, whose programs have slashed the public sector employment, urban subsidies (including subsidies on food), and the exchange value of local currencies. All of this has made it difficult for many Africans to subsist without holding multiple occupations, including involvement in all types of trade. As Mamdani points out in the case of Uganda, the economic reforms and restructuring of the past decade have turned waged workers and others into “part-time hawkers.” (Little, P. 2)
In Liberia, women who own small businesses have a hard time getting loans to expand. Banks in the country will not give them loans, until they (women) show land or house ownership for collateral. The situation is considered by experts as dire because, women who are small scale traders in Liberia, as well as most African countries have no houses or land of their own. Without loans most women stick to their petty trade; and stay trapped in that economic and social class. Economist Bedel has warned that their stagnation has a long term effect on the economic growth of the country. “The government should provide the conditions for women to gain more access to credit facilities so they could easily compete with foreign merchants, who now dominate commerce in Liberia,” Bedell said. (North, Desmond) If the trend continues, it will hamper the socio-economic development significantly.
In a press release by Capital Ethiopia news, The Metropolitan Micro and Medium Scale Enterprise Development Agency said it has granted an over 102 million Birr loan to people engaged in petty businesses over the last five months.
Agency Deputy Director Getchew Tadesse said that the agency has provided the loan to people engaged in construction, metal and wood works, food preparation, among others. More than 11,387 people have benefited from the loan, according to the deputy director. The number of people benefiting from the agency’s loan service is increasing from time to time, he said. (Capital)
The problem with access to credit for these petty traders is that the majority of the borrowers have limited education. The process of applying for loans is daunting as they need to provide business and financial plans and on top of that need to understand loan conditions and sign on loan documents.
This sector has become an essential element in the development strategy of many developing nations. According to Selvavinaygam, the heterogeneity of the socio-economic status of the rural people and the diverse nature and scale of their economic activities would imply that the demand for financial services by the micro-entrepreneurs may not be met by a unique financial institution or a uniform approach. The institutional mix, the product variety and the operational approaches must be compatible with the characteristics of different socio-economic categories if their demands for financial services are to be met satisfactorily. However, owing to high costs and risks associated with the early stages of rural financial market development, private financial institutions are unlikely to voluntarily play a major role in this process. Rural financial market development cannot therefore be left entirely to market forces, although the ultimate objective is to develop a market-driven financial system. The government also has an important role to play in the process. A well-formulated rural financial market development strategy is required to ensure that rural financial market development activities of different groups, particularly the potential small borrowers, government agencies, private sector, NGOs and the donors are carried out within a coherent framework with clearly defined objectives. (Selvaninyagam, K)
References:
Capital. Agency’s 102 million birr loan to petty traders. Vol 13, no. 646. 6 May, 2011. Retrieved on 6 May, 2011 from http://www.capitalethiopia.com/index.php?view=article&id=12113%3Aagencys-102-mln-birr-loan-to-petty-traders&option=com_content&Itemid=3
Little, Peter D. Selling to Eat: Petty Trade and Traders in Peri-Urban Areas of Sub-Saharan Africa.October 1999. Retrieved 6 May, 2011 from http://pdf.usaid.gov/pdf_docs/Pnacl390.pdf
North, Desmond. Liberia: Petty traders crucial to African economy Afrik-News.
18 APRIL 2009. Retrieved 6 May, 2011 from http://www.afrik-news.com/article15586.html
Selvaninyagam, K. Improving Rural Financial Markets. FAO Corporate Document Repository. June 1995. Retrieved 6 May, 2011 from http://www.fao.org/docrep/007/ae363e/ae363e00.htm
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