BUSINESS WORLD Micro Finance and Poverty Alleviation in Sierra Leone Posted by on Nov 18, 2008, 21:38

Sierra Leone has seen many years of under development since independence in 1961.  The staggering 70% rate of poverty in the country certainly sends devastating waves to researchers and operators of poverty alleviation schemes. There are several underlying factors that can affect the rate of output change and hence development. The most obvious among these factors are the rate of investment, increase in the size of the workforce, and changes in economic policies.

A country's macroeconomic policies will affect its growth performance through their impact on certain economic variables. For example, a high rate of inflation is generally harmful to growth because it raises the cost of borrowing and thus lowers the rate of capital investment; but at low, single-digit levels of inflation, the likelihood of such a trade-off between inflation and growth is minimal. At the same time, highly variable inflation makes it difficult and costly to forecast accurately costs and profits, and hence investors and entrepreneurs may be reluctant to undertake new projects.

Likewise, given that financial resources in the form of domestic savings and foreign grants and loans are limited, a larger budget deficit will mean that more of those limited resources must be devoted to financing the budget deficit. Fewer resources will thus be available for the private sector. If the fiscal deficit increases to an unsustainable level, private investors' perception of country risk is likely to become increasingly negative and hurt private investment.

Finally, outward-oriented trade polices are conducive to faster growth because they promote competition, encourage learning-by-doing, improve access to trade opportunities, and raise the efficiency of resource allocation. The development evidence for Sierra Leone suggest that the economic recovery of the 1960s and 1970s was underpinned by a positive economic environment influenced—either directly or indirectly—by improvements in macroeconomic policies and structural reforms.

Many studies have estimated that per capita real GDP growth is positively influenced by economic policies that raise the ratio of private investment to GDP, promote human capital development, lower the ratio of the budget deficit to GDP, avoid overvalued exchange rates, and stimulate export volume growth. These issues suggest that macroeconomic stability, the implementation of structural reforms, and increases in private investment are necessary for boosting growth in the country.

Faced with structural problems, mounting imbalances, and declining growth rates, the poor economic performance of the country since the mid-1970s was attributable largely to poor implementation of macroeconomic policies, reflecting the problem of inadequate executive capacity. For the overall macroeconomic environment to improve, the need for the implementation of rigorous macroeconomic policies has, since the mid-1980s, become very obvious. This requires that economic policy-makers and national economic managers must acquire the technical skills to analyze, formulate and implement economic policies, such that they can respond effectively to internal and external shocks. Despite several years of foreign technical assistance, however, a very serious management skills gap remains.

It must be noted that the overall economic performance of Sierra Leone remains unimpressive. Despite fifteen years of adjustment, the Sierra Leone economy is still defined by macroeconomic imbalances manifested in slow growth, rising unemployment, high inflation and huge external imbalances. It is my conviction that the time has come for a new approach and commitment to macroeconomic policy design and management, if Sierra Leone is to grow out of its current lack luster performance.

This paradigm shift calls for the use of modern techniques of economic analysis and policy formulation such as financial programming.

Areas where poor policy impacts particularly on export–oriented agriculture include inefficient and duplicative pre-shipment inspections, high port and handling charges, weak customs administration, excessive harassment by police, and poor transport regulation. If a diversified agricultural export base is to be built, long-term investment will be needed. Growth and diversification cannot rely only on the activities of rural smallholders but will require entrepreneurs to invest in larger scale production, processing, and trading in order to drive the sector forward. This will require a far better enabling environment. Growing public sector initiatives support agriculture, but coordination and cooperation are absent.

As a result, technical messages on best practice for cocoa and other tree crop production and post-harvest handling may be inconsistent, and dissemination of research and improved technologies is limited. Forward planning, strategies, and prioritizing of actions requires a foundation of reliable information not only of markets but also of the capacity to supply those markets. Information gathering, from tree stock surveys to understanding regional export markets, needs to be developed. Initially, this must be a government function but in time the private sector should formulate its own plans based on information within the trade.

Poverty

Poverty in Sierra Leone is predominantly rural. More than 70 per cent of the country’s poor people live in rural areas and depend on agriculture for food and livelihood, yet development assistance to agriculture is decreasing. In Sierra Leone, more than 26% of the population people live in extreme poverty, not being able to meet the basic need of food. It appears as if the incidence of poverty in this country is increasing faster than the population. Overall, the pace of poverty reduction in the country has slowed since the 1980s.

Rural poverty has its roots in the colonial system and the policy and institutional restraints that it imposed on poor people. In recent decades, economic policies and institutional structures have been modified to close the income gap. Structural adjustments have dismantled existing rural systems, but have not always built new ones. In many transitional economies, the rural situation is marked by continuing stagnation, poor production, low incomes and the rising vulnerability of poor people. Lack of access to markets and finance is a problem for many small-scale enterprises in Africa.

The rural population is poorly organized and often isolated, beyond the reach of social safety nets and poverty programmes. Increasingly, government policies and investments in poverty reduction tend to favour urban over rural areas. HIV/AIDS is also affecting the profile of rural poverty in the country. It puts an unbearable strain on poor rural households, where labour is the primary income-earning asset.

Micro finance

In an economy marked by the high incidence of the informal sector, the Government of Sierra Leone has identified the provision of micro-finance services to the poor, especially women, as a key mechanism to help reduce poverty. The provision of financial services (savings, insurance, loans) to low-income households is aimed at enabling them to acquire capital, improve their livelihoods and generate informal sector employment. Micro-financing is also regarded as a way of promoting employment generation, import substitution and private sector development, thus having an important impact on the local and national economy.

Micro finance is geared towards removing the limitations placed by poverty trap. This trap is what has been referred to as the “Vicious Cycle of Poverty”. Low income leads to low savings; this in turn reads to low investment and small amount of capital formation; hence low productivity leading back to low income, thus completing the cycle. This implies that as long as per capita income is low, savings and hence investment will be low and escape from the trap will be virtually impossible in the absence of micro finance.

Both government and donor organizations sponsor micro finance services in Sierra Leone. Government channels it resources through NaCSA/SAPA, which in turn lends to NGOs/ CBOs. These organizations then offer the services directly to the poor, who are expected to invest the loan amount in productive activities. This investment then produces revenue that the poor uses to repay the debt, and meet their own needs; thereby alleviating their own poverty.

However, if the poor fail to invest, this will lead to indebtedness and more poverty. While microfinance has already had a positive impact on the household budgets and quality of life for many people in Sierra Leone, the majority of the poor in the country still lack access to financial services, including credit, savings, insurance and money transfers, that can significantly raise their standard of living and better equip them to manage their lives. Filling the massive gap between microfinance supply and demand is a steep global challenge. Financial service providers, central banks, governments and donors can meet the challenge by working together to integrate sustainable microfinance into the broader financial sector. Their collective efforts will be a significant contribution to achieving the Millennium Development Goals.

Role

The provision of financial services (savings, insurance, loans) to low-income households should enable them is aimed at enabling them to acquire capital, improve their livelihoods and generate informal sector employment. Micro financing is also regarded as a way of promoting employment generation, import substitution and private sector development, thus having an important impact on the local and national economy. In order to reach so many poor people through out the country; SAPA became the micro finance programme of NaCSA.  Supported by the ADB, the main goal of MFP is to improve the livelihoods of the economically active rural poor through increased access to small-scale financial services for the development of productive actions throughout the country.

In order words, the goal of the scheme is to provide increased access of the poor to productive credit to enhance self-employment. The programme also hopes to strength micro finance institutions (MFIs) and their pregrammes. Since the Social Action and Poverty Alleviation (SAPA) Programme is the micro finance window of NaCSA, NaCSA fully subsidizes the operation and capacity building costs of SAPA.  SAPA manages two pregrammes: the chiefdom programme and the NGO programme. SAPA assured responsibility for monitoring the chiefdom programme in 2001.  At chiefdom level committees were formed as part of the programme.  A typical committee is composed of a paramount chief, a chief, and representatives of women youth and elderly. 

Informal Institutions

There are two indigenous financial institutions in the country that provide access to credit.  First, Osusu or Rotating Savings and Credit Associations (ROSCAs) are common throughout the country and serve as a mechanism for people to save for medical, bondo/poro society ceremonies, bride price, business, or school fees.  Given the low-income level of most members, the amount of funds mobilized by most Osusus are not sufficient to generate significant funds for large scale investment.