Why do micro finance institutions get such a bad rap?
“If both were to start at the same time, bad news will circle half the world even before good news stands up to start the race. Bad news , and bad reviews travel first. Most people are likely to comment after a bad episode than be quick to compliment after being served well. Good service after all is expected as the norm.” This is the explanation given by most micro-finance institutions after a spate of negative publicity pitying many such firms against borrowers , the later who complain of being robbed blind by expensive loans offered by these institutions.
…Being a micro finance institution ourselves, an attempt to offer an explanation to this matter objectively won’t be an easy sell.
But nevertheless , we shall give it a try.
The role of credit
The role of credit in helping to ‘oil’ the engine of the economy to help it roar to productivity cannot be overstated. A growing economy in a capitalist set up needs capital in private hands to galvanize itself to increased production. Capital may be accessed in various ways including earned capital ( via wages, and salaries) , inherited capital ( from parents and guardians) but a huge chunk is normally achieved through borrowed capital ( loans). For enterprise to flourish , such capital should be achieved affordably enough to allow the profit from the borrowed capital to exceed the interest charged on that capital.
Owners of capital
To this regard, the economic system is such that the owners of capital are at the top of the food chain and play a huge role in determining the pace of growth of the whole ecosystem. The banking sector, regulated by CBK , provides the backbone of the credit available . However, amid the tight regulation, the sector finds itself constrained to manage their risks more aversely, and hence lock out a lot of masses .
This remaining masses , even though some are banked, still find themselves locked out of the mainstay of the credit circles due to their risk levels. Some are risky because they have default history while others are simply risky due to lack of a proper track record in formal banking institutions to help provide the basis for credit. Meanwhile, while the main banking institutions are unable to accommodate this risk, this pool of borrowers can provide a profitable line for anyone willing to accommodate a little bit more risk.
Enter Micro Finance institutions
This is where the era of micro finance institutions were born. They , unlike banks , tend to be non-deposit taking in nature. Hence , the money they lend , is purely at the risk of the few lenders. This principally makes it hard to bring them under the bracket of formal banking sector and be regulated. Such non-deposit taking micro finance institutions thus are forced to undertake their independent risk valuations to price their credit. By the simple virtue of accommodating more risks than mainstream banks, their rates tend to be slightly higher as well.
That said, the level of pricing such risk should not be too exorbitant as to make it impossible for the borrower to repay. A good micro finance institution learns to price its risk through a reasonable interest rate that is sustainable and offer such a period of repayment , long enough to allow for affordable instalments.
What is important is for borrowers to scrutinize the loan terms keenly and remember that they can afford to negotiate key terms to help them get the best deal possible on the loan they are taking.
Some of the areas to look at include the interest rate bring charged. A good micro finance lender will give you both fixed as well as reducing rates for you to choose from. Situ Credit offers 2.6% interest rate fixed or 4.5% on logbook loans as the case may so be. If you plan to repay early, a reducing balance should always be preferred. You should also try to negotiate the clause of early repayments to avoid being penalized heavily for your otherwise good deed.
Repay your loan
It is also important to notice that many micro finance companies don’t have extremely deep pockets like the mainstream financial institutions because they don’t get deposit. Hence after borrowing, you have to ensure that you are able to meet your agreed monthly obligations so as not to collapse the system. Bad loans can present a much higher risk to their comparatively lighter capital base. Hence, many micro finance institutions will naturally place a penalty on late payments to incentivise loan repayment. It should be understood that such a penalty is for survival, not extortion.
Place of micro finance institutions
However, micro finance institutions have a serious role to play in an economy. They expand access to credit even to the higher risk borrowers and allow the economy to flourish by lubricating the lower base of the pyramid with liquidity.
While they may be slightly pricey, the cost is worth the effort. Such companies are able to offer loans in a faster time and cut down more bureaucracies that have to be followed by their heavily regulated counterparts. Situ Credit for instance, is able to disburse your loan with 24 hours of application
So to answer the original question posed: Is there such a thing as an affordable micro finance institution? We won’t hold brief for anyone else. But we shall invite you to Situ Credit to have a taste of an affordable honest micro finance institution!