Microfinance: Disaster for South Africa

    Microfinance is a source of financial services for entrepreneurs and small business lacking access to banking and related services. Microfinance schemes can come in a variety of forms including:

• Micro-credit
• Micro Savings
• Micro Insurance 

 Microfinance aims to help alleviate poverty and promote development in LEDCs. Microcredit in particular allows entrepreneurs to become profitably self-employed, allowing them to generate a stable source of income for themselves. This provides them with protection against income volatility  , with Microinsurance providing a safety net to prevent people falling back in to poverty. However the scheme has come under much scrutiny in recent years.
       Microcredit has become such a saturated market in South Africa in recent years, however has done very little to alleviate poverty . In such a way that today the Marjory of borrowers simply cannot repay even a fraction of what they owe. In 2009, studies show that 40% of money from micro financing was used to buy food and many borrowers get more loans to pay off old loans. This means that there is a cycle among those struggling to meet monthly expenses to keep going to lenders and racking up bigger loans due to an inability to fully repay the older loan. South Africa's poor are now caught in a micro-debt trap . It is argued that microcredit institutions in South Africa aimed  not to help their poor clients, but to extract as much profit from them in the shortest time possible before leaving the sector and moving on to other fields of business. Much as of South Africa's scarce financial resources are being ploughed into a vicious debt cycle created by the whole microfinance scheme, meaning that funds are diverted away from spending in the economy and generating revenues for local people. The high cost of credit associated with microfinance is likely to trap the poorest consumers in an endless spiral of debt. The case for poverty alleviation will probably be strongest when government funds are used  at highly subsidised rates to individuals looking to set up micro businesses at interest rates that they can actually afford.  Microcredit has provided many entrepreneurs with funds to set up businesses, however these are often unproductive shops or stalls that generate very little revenue, and contribute a minimal amount to the economy.