Access To Finance Is Not The Problem We Think It Is

Capital is important in starting a business but academia and the aid industry is biased in thinking it is most important part. As someone who is actively working towards starting his own company in Kenya I identify with this importance. Strategic connections, quality inputs, managerial ability, land rights, governance, etc are all essential components as well but that is not what I want to talk about. We talk about finance as if without financial institutions and government support in the sector entrepreneurs are operating in a vacuum. This is far from the case and goes against nearly every historical growth story we have.

In studying China’s growth starting in the 1980s and the Industrial Revolution in England and then in the broader West it is so obvious that access to finance was a constraint but one that could be overcome. The traditional source of financing is not from institutions but from friends and family. This has always been the case and realistically still in the case for the vast majority in both the developed and underdeveloped world. In a book published by the World Bank, sector after sector is chronicled in China where an individual started with an opportunity and the money that was available to him with his network and built a multi-million dollar company. No formal financing was obtained in every single case until significant growth of the business had occurred. The story is still the same today in the US (outside of app developers in Silicon Valley). Build it and then the money will come.

In Africa there isn’t a lot of money around but we are very ignorant if we don’t think their IS money around. The poor are heavily reliant on each other not just in a physical sense but in a financial sense as well. If there is a need the money can be found. Similarly, if there is an opportunity then money can be found. If not, then maybe the opportunity isn’t as good as they thought. This is true of business financing everywhere.

Why do you think microfinance has not led to significant business growth? Why haven’t businesses grown to take on employees? The push for access to financing has lowered this constraint but to think there were no options available outside of this push is wrong.

Microfinance Group In Bangledesh

Personally I believe that academia and governments are heavily biased in hoping that this was the major constraint because they can address it from afar. It is far easier to give money than work to build relationships with suppliers, to address contentious issues like land rights, or to allow outside capital to finance small businesses rather than just large ones. Jobs don’t always do to where labor costs are the lowest and capital doesn’t always go to where it can be cheaply obtained. It is about what you get versus what you pay. Access to finance address one side of the equation but the real problem is on the other side. That is a much more nuanced problem to solve and one that academics and government are adverse to because there aren’t large sweeping ideas they can push out press releases for.