Problems of Microfinance

To reduce the poverty and to develop the condition of poor people, Microcredit is being used as a weapon in recent years. Especially in the third world countries, the importance of Micro credit is discussed widely. Dr. Yunus’s Micro credit system has got very wide attention in this case. From 1980 many firms have started their micro-credit activities. Now the question is how much role they really played to reduce poverty and the topic is much more controversial. Now I am going to discuss about some of the negative issues of this system.

Today, if you look at the credit distribution system of NGOs, you will see that the credit is not given in productive sectors.  The NGOs don’t give loans individually. Only a group of 5-8 people can get credits. If a person run away or die, others have to pay the debt together. That means, there is no chance of losing money for the NGOs. That is the reason why people don’t need to provide collateral for taking micro credit. However, if NGOs say that they provide loan without collateral, it’s not totally right. Because, group members collectively are the guarantee of themselves.

Let’s move to financial analysis. Suppose, you took a loan of 500 euro with 15% interest rate. That means, you have to pay 75 euro interest after the year. But the company will keep 50 euro as compulsory payback. So, you will actually get 450 euro. And you have to pay interest of 75 euro. As a result, your actual interest rate would be 16.67%.

credit-unions

If you take a loan for 1 year, you have to pay interest every week (52 weeks). So, on the first week you have to pay near about 11.1 euro. As financial term, you can keep 500 euro the whole year and pay 500+75 at end of the year. But here, you only get 450 and pay 11.1 each week. That’s why you won’t afford to invest money in productive sectors which takes long time to return your investment. Another thing is, you have to pay more interest rate in real than they showed.

I put the interest rate 15% in my example. Now imagine, what would be the situation if the interest rate is more than 30%! Poor people will have to work harder and harder to pay their debt back. Their condition will never change if they have to pay that high rate of interest.

If you ask, why the people take micro credit then? Actually, many people have no choice except taking loans. For example, if a boatman needs to repair or buy a boat, he needs an initial investment. And he can pay it back afterwards in a regular basis. For him, Micro credit would be helpful but for investing in a productive sector, it will not be a good decision to take micro loan.

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