Credit Access in Togo: Pros and Cons of the Microcredit System

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LOME, Togo — The Togolese Republic, also known as Togo, is a small sub-Saharan country in Africa that lies between Ghana and Benin. Togo is vibrantly diverse—it is home to over 30 different ethnic groups that emigrated from both Africa and Europe.

Like many African countries, Togo has a predominantly rural population that is overwhelmingly reliant on agriculture as a main source of income. However, as a country with a high birth rate and low death rate, poverty is one of the nation’s biggest concerns—especially since the 1990s when political instability severely impacted tourism and thus, the service industry which covers two-fifths of the country’s Gross Domestic Product (GDP).

Expanding credit access in Togo could be one solution to helping the impoverished to lift themselves out of poor living conditions.

Background

After gaining independence in 1960, Togo basked in a high standard of living due to the natural phosphate deposits in the area, and a booming export economy that supplied commodities such as coffee beans, cocoa beans, peanuts and more.

Throughout the 1990s and early 2000s however, the country’s political instability and low market price for exports drastically impacted the economy. In fact, 61.7 percent of the population, lived below the poverty line in 2006. However, as the economy slowly improved over the subsequent decade, fewer people live in poverty today as the poverty rate has decreased by almost 10 percent.

According to UNICEF, microfinance is playing a significant role in lifting people out of poverty.

Microcredit in Togo

Introduced in the early 2000s, Togo’s microcredit system supports women’s entrepreneurship, job growth, access to affordable clean energy and more.

At its core, microcredit—or microfinancing—is exactly how it sounds: the process of lending small amounts of money to help individuals or small businesses gain resources to help facilitate their business so they can make money faster. This process helps individuals or groups of individuals begin working immediately, thus paying off their loans quicker and maintaining a stable source of income.

Vigoumide Ahouagbe, a widow and entrepreneur boasted about of the microcredit system and the growing credit access in Togo, saying: “What is different now with the microcredit is that I can buy the raw products immediately, so I can do more business quicker.”

According to the World Bank, financial inclusion in Togo drastically increased in recent years, mirroring rates in more developed African countries such as Madagascar, Chad and others. In 2018, World Bank approved a $40 million grant for Togo, to promote economic growth in the country.

Potential Challenges

Although this system effectively gives a sense of financial agency and economic empowerment to many people—not only in Togo but in numerous countries on the African continent—experts warn that the benefits of microfinancing might fall short in the face of growing outstanding loan payments.

In 2016, the Togolese government convened to amend Togolese law in regard to the loan system, restructuring the way the country lends money to potential applicants. To mitigate the risk of nonpayment, banks, microfinance institutions and decentralized financial systems will assess lenders ability to pay back loans with interest, holding them to a much higher standard than ever before.

While this kind of legislation will certainly protect financial institutions, there is no telling what the effect will be on prospective lenders, many of whom have no way to prove their loan credibility or who have struggled with credit access in the past due to high rates of poverty.

The Way Forward

Although the microcredit system greatly expanded credit access in Togo and made for a more inclusive financial sector, Togo ranks fourth for the greatest number of outstanding loans and has the second lowest GDP on the African continent.

In Togo, many people continue to suffer from job insecurity and the lack of resources to support themselves. While growing credit access in Togo was an imperative step toward regaining economic stability for individuals and the country as a whole, moving forward it seems as though microcredit might not benefit the overall economy as much as originally thought.

According to Africa Renewal, a U.N. agency, microcredit in particular is a system that channels “…scarce resources into unproductive micro-enterprises in the informal sector [which]may actually be detrimental to sustainable development and industrialization. This is because tiny businesses contribute little to building an economy’s productive capacities, or to its structural transformation.”

Looking toward Togo’s economic future, microcredit is a system that has the potential to alleviate poverty if managed properly. With that in mind, one must remember it is still a fairly new system. Although there are significant flaws, the impact it makes on empowering the individual is an undeniable strength.

– Morgan Everman
Photo: Unsplash

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