July 30, 2020 - BY Admin

MICROFINANCE INSTITUTIONS AND THEIR PROBLEMS....

ACCORDING TO SEVERAL REPORTS IN THE MEDIA, MICROFINANCE IN STITUTIONS FEEL THEY ARE ON THE BRINK OF COLLAPSE. THIS IS MOSTLY BLAMED ON THE ECONOMICAL SITUATION. FOR THAT, IN TURM, THE CORONA VIRUS IS BLAMED, AS USUAL.
AS A REMINDER, MICROFINANCE INSTITUTIONS SPRANG UP MOSTLY IN DEVELOPING COUNTRIES AS A FOLLOW-UP TO THE GRAMEEM BANK IN BANGLADESH. THE GRAMEEM BANK IS AN INSTITUTION THAT MOSTLY SUPPORTS PEOPLE IN RURAL AREAS, OFTEN WOMEN, TO ESTABLISH MICRO BUSINESSES, ESPECIALLY IN THE AGRICULTURAL SECTOR.THE EMBURSMENT OF THE LOANS IS BASED ON A SOPHISTICATED SYSTEM, AND THE INTEREST RATES ARE USUALLY EXTREMELY HIGH. BUT IT WORKS...
UNLIKE THE GRAMEEM BANK, MICROFINANCE INSTITUTIONS IN GHANA OFTEN DON'T WORK SUCCESSFULLY. THAT HAS MANY REASONS. IN ORDER TO ATTRACT CUSTOMERS, THEY OFFER EXTREMELY HIGH INTEREST RATES FOR DEPOSITS. IN TURN, TO MAKE PROFIT THEY HAVE TO CHARGE EXTREMEY HIGH INTEREST RATES FOR LOANS AS WELL. THIS OFTEN LEADS TO THE BORROWER OFTEN NOT BEING ABLE TO REPAY THE LOAN. THE CONSEQUENCE IS THAT AT THE LONG RUN - IF THIS SCENARIO HAPPENS TO OFTEN - THE MICROFINANCE INSTITUTION WON'T BE ABLE TO PAY ITS HIGH INTEREST RATES FOR FIXED DEPOSITS. AND THEN THEY'LL LOSE THEIR CUSTOMERS. IT SOUNDS A LITTLE BIT LIKE A PONZI SCHEME, DOESN'T IT? (A PONZI SCHEME IS  " 

a form of fraud in which belief in the success of a non-existent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.)

WELL, IT'S NOT EXACTLY THAT, I ADMIT, BUT IT CERTAINLY SMELLS LIKE IT.

THE PROBLEM IS THAT THE CENTER INTEREST OF MANY MICROFINANCE INSTITUTIONS IS MORE TO MAKE PROFIT THAN TO ASSIST THE CUSTOMERS. BUT DO WE HAVE AN ALTERNATIVE?

YES, WE HAVE...

THE ALTERNATIVE ARE RURAL AND COMMUNITY BANKS. SURE, ALSO THESE BANKS MUST MAKE PROFIT, AND THERE ARE SURELY ENOUGH PROBLEMS TO SOLVE. THE MARGIN BETWEEN THE INTEREST RATES FOR FIXED DEPOSITS AND LOANS IS TOO WIDE AND, WITH ALL DUE RESPECT, MISTAKES IN THE RUNNING OF THE DAY-TO-DAY BUSINESS APPEAR TOO OFTEN. BUT THESE ISSUES CAN SURELY BE SOLVED THROUGH INTENSE SUPPORT BY STAKEHOLDRS LIKE THE GOVERNMENT OR THE BANK OF GHANA. FURTHERMORE, THE APEX BANK SHOULD TAKE A CLOSER LOOK AT ITS ROLE TOWARDS THE RURAL AND COMMUNITY BANKS. A PROBABLE BUSINESS MODEL WOULD BE TO MAKE RURAL ANS COMMUNITY BANKS LOCAL BRANCHES OF THE APEX BANK, AND MAKE EXISTING RURAL BANK SHAREHOLDERS SHAREHOLDERS OF THE APEX BANK.
WHATEVER SOLUTION THERE IS FOR THE PROBLEMS OF RURAL AND COMMUNITY BANKS, THEY ARE SURELY A PROPER ALTERNATIVE TO MICROFINANCE INSTITUTIONS.

SUPPORT YOUR LOCAL RURAL AND COMMUNITY BANK!