People who know me, know I am extremely passionate about microfinance. I love the doors it opens for individuals, I love the way it can help develop a community, and I love the way this system creates financial institutions that transcend income bracket. I firmly believe that financial inclusion needs to be one of the first steps toward transitioning from a developing to a developed country. We need to create opportunities for all people to grow and contribute to the local economy. Afterall, a rising tide lifts all boats.
Oddly enough, microfinance has become a divisive issue. As Amy Yee says, “In recent years, microfinance—distributing small loans to the poor—has been at the center of an intense debate about the ethics of charging low-income customers high interest rates and then making a profit from them.” One side says it’s illogical to press the lower class or needy with high interest rates they might never get out from under. The other half, where I wholeheartedly stand is that while microfinance is intended to help lower-income brackets, it still needs to be a viable business model.
Even with these ‘too-high’ rates, we still manage to stimulate a growing economy, create new opportunities for those who might not otherwise have one and create a sustainable model in the process. As Elisabeth Rhyne describes, “With the relatively high cost of acquiring new clients in microfinance, financial service providers survive based on long term customer relationships. Setting a price that allows the client’s business to thrive helps to generate more future business for the financial institution.”
We need to think sustainable. Lenders need return on their investments in order to support other initiatives and, unfortunately, there are more risks with micro-loans than our typical loan model. That being said, it’s essential because it’s also a chance to make a wider reaching impact on the economy and lives of those in the community. Why charge higher interest rates then you ask? It’s the risk and effort involved. There’s an element of pounding the pavement for microfinance lenders. As described on MicroWorld.com, “On a day to day basis, microcredit agents are out in the field, sometimes in villages that are difficult to access, meeting lenders and following up on loan repayments. It is a time consuming job that is at the core of the microcredit business.”
I leave you with this. The current microfinance model has its imperfections, like all systems. For now, it is the best we have. That being said, we all have the ability to initiate change. If you have ideas for a more stable, less challenging approach, voice it. Help us solve these nuanced issues. There is always room for growth.