What are the Biggest Obstacles that Microfinance faces today?

In my experience, microfinance is a very important sector to promote the development of communities, as it supports small producers and merchants, by giving them access to credit and supporting them so that they a model for their business. In accomplishing this task, they are capable of paying back their debts and are able to keep growing with the support of microfinance institutions.

Nonetheless, nowadays I believe that there are external and internal factors (endogenous and exogenous factors) that do not allow this chain of growth to consolidate in certain places. I would like to mention the following internal factors:

1. Lack of capacity on behalf of microfinance institutions to evaluate the real risk of the client and to provide the adequate support so that they do not fail. Microfinance institutions must be flexible with these high-risk clients, as they present a different behavior than the typical clients (already used to microfinance)

2. Technical support to clients so that their businesses grow adequately and so that they can pay back their debts. Given that they are microentrepeneurs that do not have the capacity, in the majority of cases, to separate the income from their business from the family income, and failing to establish that division, they fail to understand the real margin of profitability of their products. This way, when they have to assume their economic compromises, they enter a possible state of default.

There are also external factors that do not allow growth, such as:

1. Over indebtedness of clients in certain sectors and certain kind of clients. There is a moral risk that both the client and the microfinance institution face; the latter does not adequately evaluate the level of risk of the client. This concept is considered an external threat to the idea of microfinance, where both the institution and the clients must be aware of the problems that this threat could bring to the microfinance sector of any country and could undermine and discredit the aforementioned objective stated in the first paragraph.

2. High funding costs to microfinance institutions. These costs are sometimes transferred to clients (sometimes up to 4 to 10 times the rate of interest), depending on the type of credit and conditions. Nonetheless, this point is important because we must take into account that these type of clients who are considered high risk, must be charged higher rates of interests that can match that potential risk, but not to such a high level that make many small entrepreneurs fail to obtain a second opportunity because they were never capable of paying their first credit because of these high rates of interest.

Finally, I would like to state that the obstacles aforementioned can be overcome in the microfinance sector only if all of us decide to put in the best of our efforts to stop it, from the mediators, the microfinance institutions, the clients and the technical assistants, with the objective of not only helping those who need it the most and who deserve it the most, but at the same time helping to accomplish the final objective which is to reduce poverty in our developing countries.

Jhonny Cabellos Mendo is CFO of CRAC Senor de Luren (Peru)

PS: In this article I expose personal ideas that do not necessarily illustrate the problems of the microfinance institution in which I currently work.

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