The success of microfinance programmes as agent of poverty alleviation is well known. Enthusiasts can point to repayment rates of over 95 per cent, the high participation of women, associated improvements in the health and education of children, and the potential for the macrocredit system to become financially sustainable in the long-term.
The success of microfinance has been marred by severe criticism of high interest rates, exploitation of women borrowers, unchanging levels of poverty and a failure to cater effectively the target groups. The very poor individuals are often described as high risk as they cannot offer collateral and have no stable source of income.
Loan repayment is one of the major challenges to microfinance, given that a poor repayment culture has plagued numerous microfinance initiatives. The causes of default in microcredit can be divided into four main categories. These are organisational, household/financial, group dynamics, geographical location and environmental degradation/haphazardness.
High repayment rates are insufficient to drive the microfinance revolution. High interest rates are seen as necessary for generation of profitability and for reduced reliance of microfinance institutions (MFIs) on external funding.
Different studies show that the poor are extremely sensitive to increases in interest rates, which results in a reduced demand for financial services. Pakistan Poverty Alleviation Fund provides loans for microcredit to different organisations like the Rural Support Programme networks and other NGOs at six per cent interest rate.
Lending microcredit organisations give loans to the poor at the interest rate of 22-28 per cent. Many organisations are suggesting interest rate hike from 28 to 32 per cent which is not feasible. The total administrative and other costs of Rural Support Programme Networks and other NGOs ranges between 2—4 per cent only. Apart from six per cent interest on microcredit loan, PPAF provides free training and other opportunities including infrastructure facility through the same microcredit lending programmes.
According to the World Bank, another 90 million people all around the world have again become poor. In Pakistan, about 70 per cent live below the poverty line. In the prevailing situation, an increase in the interest rate can be more harmful to borrowers.
Studies in India, Kenya and the Philippines have found that the average annual return on investments by micro businesses range from 117 to 847 per cent. If they are so lucrative, why are not businesses sustainable? These and other studies have shown that failures are because of high inflation rate, surging food prices, lack of training and high interest rates.
Capitalising micro-businesses is one piece of the solution, but without a wider, holistic effort, this kind of credit will mainly benefit the entrepreneurs and slightly less poor who are able to develop business plans and make them work.
Additionally, microcredit models often fail to build borrowers’ capacity to do anything but develop a market analysis and basic business plan. A large number of the poor especially women are marginalised within their communities and even their families, and lack confidence and experience in trying something new.
They have responsibility not only for contributing to family income but to caring for children and the ill, collecting water and fuel wood, preparing their family’s meals, maintaining the home and any number of assorted family responsibilities. If the bigger picture of workload and marginalisation is not addressed in a significant way throughout the microcredit lending process, women will continue to struggle with an impossible burden.
Microcredit lending institutions should think about a new approach for improving the microcredit system. Small loans with lower interest rates and surrounding conditions, will give more sustainable help to the poor to start a simple business.
Microcredit unleashes the entrepreneurial spirit. Simply to survive, the poor rely on their own ingenuity. When given an opportunity to succeed, they do it with a determination to break the vicious cycle of inherited misery.
The success of microfinance has been marred by severe criticism of high interest rates, exploitation of women borrowers, unchanging levels of poverty and a failure to cater effectively the target groups. The very poor individuals are often described as high risk as they cannot offer collateral and have no stable source of income.
Loan repayment is one of the major challenges to microfinance, given that a poor repayment culture has plagued numerous microfinance initiatives. The causes of default in microcredit can be divided into four main categories. These are organisational, household/financial, group dynamics, geographical location and environmental degradation/haphazardness.
High repayment rates are insufficient to drive the microfinance revolution. High interest rates are seen as necessary for generation of profitability and for reduced reliance of microfinance institutions (MFIs) on external funding.
Different studies show that the poor are extremely sensitive to increases in interest rates, which results in a reduced demand for financial services. Pakistan Poverty Alleviation Fund provides loans for microcredit to different organisations like the Rural Support Programme networks and other NGOs at six per cent interest rate.
Lending microcredit organisations give loans to the poor at the interest rate of 22-28 per cent. Many organisations are suggesting interest rate hike from 28 to 32 per cent which is not feasible. The total administrative and other costs of Rural Support Programme Networks and other NGOs ranges between 2—4 per cent only. Apart from six per cent interest on microcredit loan, PPAF provides free training and other opportunities including infrastructure facility through the same microcredit lending programmes.
According to the World Bank, another 90 million people all around the world have again become poor. In Pakistan, about 70 per cent live below the poverty line. In the prevailing situation, an increase in the interest rate can be more harmful to borrowers.
Studies in India, Kenya and the Philippines have found that the average annual return on investments by micro businesses range from 117 to 847 per cent. If they are so lucrative, why are not businesses sustainable? These and other studies have shown that failures are because of high inflation rate, surging food prices, lack of training and high interest rates.
Capitalising micro-businesses is one piece of the solution, but without a wider, holistic effort, this kind of credit will mainly benefit the entrepreneurs and slightly less poor who are able to develop business plans and make them work.
Additionally, microcredit models often fail to build borrowers’ capacity to do anything but develop a market analysis and basic business plan. A large number of the poor especially women are marginalised within their communities and even their families, and lack confidence and experience in trying something new.
They have responsibility not only for contributing to family income but to caring for children and the ill, collecting water and fuel wood, preparing their family’s meals, maintaining the home and any number of assorted family responsibilities. If the bigger picture of workload and marginalisation is not addressed in a significant way throughout the microcredit lending process, women will continue to struggle with an impossible burden.
Microcredit lending institutions should think about a new approach for improving the microcredit system. Small loans with lower interest rates and surrounding conditions, will give more sustainable help to the poor to start a simple business.
Microcredit unleashes the entrepreneurial spirit. Simply to survive, the poor rely on their own ingenuity. When given an opportunity to succeed, they do it with a determination to break the vicious cycle of inherited misery.
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