Connecting microenterprise practitioners in a global learning community

MICRO FINANCE - REALLY FOR THE POOR

CURRENTLY 20% TO 30% INTEREST CHARGE ON LOAN. DO YOU THINK THAT THIS IS REALLY FOR POOR...

Replies to This Discussion

Permalink Reply by H Joshi on March 1, 2011 at 9:32am

Its not that bad. Earlier poor people had to pay 100% loan to money lenders whenever they needed money for any purpose. Paying tax 20-30% is very less amount than 100%.

▶ Reply

Permalink Reply by Mohammad Azahar on March 1, 2011 at 1:34pm

In the era of money lenders maximum numbers of farmers and poor was not repaid their loans and because of this they chosen 'suicide', as same as in the time of NBFC lot of suicide cases come in existence. In Andhra Pradesh numbers of suicide cases register just because of NBFC strategies.

The average annualized interest rate charged by SKS Microfinance is 28.3% and they justify by showing their expenditures.

SALARY AND INCENTIVES - 6.4%

OVERHEADS AND ADMINISTRATION - 4%

COST OF FUNDS - 8.5%

LOAN LOSS PROVISIONING - 1.5%

CORPORATE TAX - 2.8%

PROFIT - 5.1%

Cost to borrower - 28.3%

But they can't justify poor. They face difficulties to repay loan and at last after threatening by MFIs they choosen finally 'suicide'.

Microfinance is a mission driven, socially oriented direction that we want to establish and expand. when you are floating IPOs you are going into business to make money and if you want to do business with the poor with the intention of making money, don't claim this to be microfinance.

Microfinance is a good example of social business and social business funds can be available for microfinace activity.

IPOs will push the market where it always was. we will go back to the same old place. Poor people will remain where they are.

▶ Reply

Permalink Reply by SM Farid Uddin Akhter on March 1, 2011 at 11:19pm

Yes microfinance inevitable to initiate any enterprise by the poorer. We must ensure it. The present discussion taking place in different area cause it was not planned enough considering total situation. I believe certainly we would follow some specific rule having mindset we would be flexible as maximum as possible aimed at serve the poorer, undone.

We must aware about the capacity of field force to assess the investment's feasibility, productivity and skill of loane. I think right now major thrust should come to capacitate the field force. We could initiate local level planning to identify the trade that feasible for investment in the area. And finally I could say initiate with small.

▶ Reply

Permalink Reply by Anne Priya on March 2, 2011 at 5:07am

First of all, we should see the calculation method of interest rate, whether Flat rate or Diminishing balance method. In case of Diminishing balance method, as per my experience, 20% is reasonable to charge. Another important thing to notice is why the MFI charges more than the Bank. This is because they have to meet out all their expenses with the interest rate collected from the members. When the outstanding and member size increases, they can slowly reduce their interest rate. It all depends upon the operational strategy of the MFI.

However, now a days, most of the MFIs in India are charging more, even they have the wide business almost in most of the states in India. This is because most of the NBFC -MFI, float equity and shares in the market and made it as a business rather than community development

▶ Reply

Permalink Reply by Joseph Kimani Maina on March 3, 2011 at 12:50am

I concur that microfinance institutions that indeed are microfinance are a much better option for the poor. However,in countries like my homeland Kenya,there are a whole lot of organizations that are taking advantage of the newly enacted MFI Act that allow regulated MFIs to take deposits from the public by claiming to be MFIs yet they are solely profit driven. Once they get the licences their niche is likely to change to other less risky categories of customers-They ideally do not believe that the economically active poor are a worthy lot to invest in.

In my experience at various levels of microfinance management,I would add to Mohammad Azaha's list below some other factors that contribute to higher interest rates for MFIs as follows;

Credit Only MFIs use money which they have borrowed from else where to on-lend.At times,they are even forced to borrow from banks. In this case you would not expect the MFI to lend at the same rate it has borrowed from the banks.
The costs of administration per unit are higher for small loans.
Many MFIs are challenged in adopting technology for business thus they end up being labor-intensive hence higher costs.Manual processes also add up to the costs.
MFIs target normally marginalised groups of people for proper financial inclusion-they end up spending alot in outreach and entry into remote and rural areas.
MFIs have to spend on financial literacy programs to effectively manage loan portfolio quality,a concern that is rarely in banks or other mainstream financial institutions. This increases their costs of operations.
MFI business requires a high touch,high contact and is highly personalised with the clients. This means that there must be a consistent interaction between credit officers,managers and the clients. In a banking setting,the customers come to the bank while in MFIs the MFI goes to the customers, It speaks volumes about the costs of operations.

May I suggest a few solutions:

The variious regulatory authorities i.e Central Banks have to incentivise MFIs highly by ensuring that some of the regulations that stifle innovation are relooked into. In addition,some of the regulations add up to high costs e.g reporting systems,MIS,e.t.c.
The governments/other international funding bodies could consider giving some soft loans to MFIs to build capacity and acquire relevant technology that will cut on costs.
MFIs should endeavour to adopt current technologies and delivery channels that will balance between high touch and costs cutting.
Unscrupulous MFIs should be wholly curtailed so that they do not exploit the poor by riding on the good will that MFIs are slowly gaining in the world.
Organisations like the IFC/World Bank and other international finance agencies should make the costs of funds much lower for MFIs or give generous repayment periods to MFIs to enable them turn around and re-plough profits before they can repay the loans.
Alot of training should be encouraged the world over for both MFI Managers and clients so that there is a proper connection in terms of products offered and the needs of the clients. This would also be a strategy to prevent and manage default.
MicroInsurance is an aspect that should be fully exploited so that issues like vagaries of weather and other occurences that almost always affect the micro-clients can be amply mitigated against.

Thank you very much

▶ Reply

Permalink Reply by H Joshi on March 3, 2011 at 4:46am

For real development of a sector a single instrument can not work. It is like that five fingers make fist thus strength and single finger is weak.

MFI is just like single finger and without aid of other instruments like government support, banking support, corporate support and other institutions' support one can not excel in this area.

Hence only MFIs should not be blamed for not serving the poors. These are working up to their limits rest other instruments should also work. Complete poverty eradication is not the work of these MFIs.

▶ Reply

Permalink Reply by Mohammad Azahar on March 3, 2011 at 9:59am

I also want to add solution to address repayment problem.

1- Rs 10000-15000 loan provide to the poor and the loan should not less than 15 months and more than 24 months.

2- Not more than 25% of the loans granted by MFIs should be for non-income generating purposes.

3- Stop multiple lending.

4- Recovery should be on monthly basis.

5- Objectives is doing social business, not, doing business with poor.

▶ Reply

Permalink Reply by Atinga Christiana on March 4, 2011 at 4:50am

NO, If 20% to 30% are charge on loan it's really not for the poor what kind of business will they engage in that will give them higher returns to repay the loan. onces the interest is high the people rather think of remaining poor than to go for loan which will end up given them problems

▶ Reply

Permalink Reply by Mohammad Azahar on March 7, 2011 at 6:26am

Microfinance is not, but only, serving poor.

Three billion of people from toal population of world lacked access to financial services, so extending banking facility to the individuals had the potential to transform economies and improve livelihood.

I want to clarify the meaning of Microfinance.

Microfinance is not only providing money to poor because only providing money and repay these loan is called business and every business one motive "earning profit" from every possible way. so earning money through poor means business with poor, then this is not Microfinance.

Microfinance is to the poor, for the poor not targetting the poor.

Microfinance is socail business. Providing money is prime motive but behind providing money it provide services like education, health, infrastructure, capacity building, skill generating, training etc.

I am strongly with Microfinance, seriously Microfinance is really for the poor.

If it is not for the poor then,

Why UN announce 2005 as International year of Microfinance?

Why in 2006 Mohammad Yunus get Nobel peace award?

Why in late 90's when South East Asia economy collapse then only Rikyat bank was in profit?

Why Indonesia come out from core poor?

Why Co-operatives, Commercial and Rural Regional Banks disbused Rs 14,45,330 lakh to 15, 86,822 SHGs? (Source NABARD)

Why World bank take initiative in Microfinance?

Why SEWA provide Solar lantern to its member? (total 30,000 solar lantern distributed)

Why Pranab Mukherji proposed 'India Microfinance equity fund of Rs 100cr with SIDBI' in current budget?

Why Rs 500cr given for SHGs development fund?

How 10.64 million people income cross Dollar 1.25 per day in Bangladesh?

How Kudumbashree empowered 37 lakh members in Kerala?

How Kudumbashree cover 50% of household in kerala?

How 90% women member of kudumbashree gain their self confidence and stand against poverty in Kerala? (Source Kudumbashree website).

How "CHETNA" had 850 SHGs group with 16500 members spread across 110 villages in one year with outstanding loan of Rs 80 lakh and on time repayment rate is 100%? ( Source "Microfinance redefining the future" written by V S SOMNATH).

How a small NGO "GRASS" had disbused Rs 195 lakh to 213 SHGs.

How according to Malegam report MFI increases its portfolio like anything.

In North - 88.52%

North-East - 163.62%

East - 66.42%

Central - 25.81%

South - 37.09%

So all WHY and HOW prove and justify that Microfinance is really for the poor.

Behind this, floating IPOs in Microfinance is loan shark direction and this is not Microfinance road. You want to be loan sharks, go become loan sharks, don't call yourselves Microfinance. Don't confuse people.

Microfinance is a mission-driven, socially oriented direction that we want to establish and expand. (Mohammad Younus)

If you want to do business with the poor with the intention of making money, don't claim this is Microfinance.

Please don't abuse the name of Microfinance.

▶ Reply

Permalink Reply by Abner T. Ramos on March 7, 2011 at 9:53am

Micro means small hence, micro finance is for the poor. But capitalist misused the true meaning of micro for personal gain in term of profit maximization.

Micro finance or micro credit should be used for entrepreneurial undertakings wherein the lender and the borrower should go into business partnership. I have conceptualized a business model purposely for a grant which I would like to share for your comment.

http://www.breakthroughinnovationgrant.com/cooperative-adapts-micro-financing-and-network-marketing-in-its-quest-to-poverty-alleviation/

In my business model, I used the cooperative as the institution, the micro franchising as a development tool and structure, and networking marketing as a method in the promotion and movement of products and services