22 mai 2019

The Security (Collateral) Requirements Of MFIs Create A Barrier To Entry For The Youth And Women

According to a survey conducted by African Development Bank, youth unemployment in Africa is two times that of adults. This is a very serious concern because the youths make up more than 60% of the entire population. Various governments and private entities have been on the forefront to champion for self-employment to bridge this gap.

However, most of the areas that youths and women can invest in require huge amounts of capital. Cases of default on loans are very common in this content. Banks thus demand collateral before advancing the loans. Some of the assets banks take as collateral include title deeds, logbooks and solid investments. This requirement bars most youths and women from accessing credit due to the following reasons.

  • Most of them do not own assets

Research conducted over the past few years ranks Africa as the youngest continent as it has more than 40% of the working population lying between 15-24 years. Most of those them are of legal age, but they do not have any investments.

The youths have not yet accumulated enough wealth to invest in assets like the older generation. In fact, some have not even decided what they want to do with their lives. This generation does not have the motivation to save because they believe they will get a better job in future.

  • Most of the youths are still struggling with student loans

Some of them are still fresh from school. In most countries, governments advance student loans to the needy to help them attain education. When such students fail to secure formal employment, they turn to innovative business ideas. However, most financial institutions expect these youths to have cleared student loans to qualify for loans from them. Such youths cannot even invest because most of their income ends up servicing loans. Some of these loans have high penalties which make the situation even worse.

  • Not many people are willing to be guarantors

Some banks are somehow lenient and allow their customers without collateral but must have a guarantor. However, finding someone to guarantee a loan is an uphill task for many youths. In such an agreement, the guarantor agrees to bear the financial debt in case the loaned is unable to pay the debt.

The lending institution or bank has the right to go after the guarantor if the loaned fails to repay or honor the agreement as per the terms. This arrangement is most appropriate for salaried individuals with job security. Many guarantors have suffered under such agreements, and thus most people are unwilling to act like one.

  • Communal ownership of property is still prevalent in Africa

This continent is still young. Property wrangles are very common because most countries do not have solid policies on land ownership. We still have nomadic pastoralists who move from one place to the other in the search for grazing grounds for their cattle. Most of the land ownership policies that we have today were drafted in the colonial era even though there have been some improvements.

Land remains the most popular form of collateral, but communal land ownership is a barrier. No bank will be willing to advance a loan to an individual who attaches the title deed of a community. Some communities do not have title deeds which even makes the case even worse. Others have the title deeds, but the land is supposed to be passed from one generation to the next. Youths and women can never use such certificates to secure loans because they do not bear their names.

The security requirement is among the many barriers that hinder youths from accessing loans. Others include lack of financial education, high-interest rates and ignorance from the general public. Some financial institutions like Medina are working towards making it easy for the youths and women to access such loans.