Bottleneck in Credit Facility of Microfinance Bank
Tunde Raji - June 2, 2016

My focal point on this subject is based on my personal experience when I urgently needed cash loan for personal use. I was privileged to approach several microfinance banks within Lagos state for cash loan. Amongst microfinance banks approached includes licensed national, state, and unit microfinance banks.

I discovered that majority of microfinance banks in Nigeria disburses loan to clients at “flat interest rate” on principal loan sum instead of “reducing balancing” on principal loan sum. For instance, on the average most of the microfinance banks I approached gives 5% flat interest rate repayment per month on principal loan sum to clients. This is an outrageous sum of 60% interest rate per year on principal loan sum. In actual practice, none of the microfinance banks I approached for loan offers credit facility for more than 9months tenor. Cumulatively, at the maximum tenor of 9months, the total interest repayment is 45% on principal loan sum (excluding processing fee which could be % on principal loan sum or a flat fee).

From my own perspective, I see it as being unfair to charge micro-credit clients at flat rate because repayment is made on monthly basis or on agreed terms of repayments. The principal residual value of the current month is supposed to be charged on the mandatory flat interest rate.

My argument is that once a micro-credit client is fulfilling the obligation of monthly repayments, there is no need to amortize interest and principal on flat rate basis.

It is pure cheating!  The survival and sustainability of Small and Medium scale Enterprise should be paramount to microfinance bank operators through lower interest rates at reducing balance basis.

25 thoughts on “Bottleneck in Credit Facility of Microfinance Bank”

  1. Most microfinance banks hinge their high interest rates on running cost, ROI, possible default in repayment on the part of the borrowers, etc. I am sometimes forced to be on the same page as they are in terms of ‘possible default in repayment’ being that fatigue always always set in when paying back on a facility hence the need to amortise and charge high interest rate in a way that most of the principal borrowed is already paid back within the first few months of the facility.

    1. Dear Ayo,
      If the industry players hinges on running cost as the reason for charging high interest on loans to their clients (the poor and low level income earners), the purpose of establishing microfinance institution is defeated.
      That’s my personal opinion.

      1. Sir, please note that most of these MFB’s are established and run on investors fund. The only time we would get proper MFB’s in this part of world is when these MFB’s get support funds from either the government or good spirited citizens who just want to support a good cause. Also to note is that most MFB’s running in Nigeria as at today ain’t MFB’s in the real sense of the word but Consumer finance lending institutions whose sole aim is to make profit.

        1. Well said, but I think the regulatory bodies in the financial service industry in Nigeria should intervene for the poor and low income entrepreneurs by controlling or putting a benchmark on Interest Rates chargeable by operators of microfinance banks in Nigeria.

          1. I was privileged to partake in Turn-around NEED assessment of some MFB and the result shows that the most significant determining the positive growth of mfb is access to cheap fund, preferably deposit from the customers/clients. If thus fund is available, mfb will be able to offer cheap interest rate, percentage of non-performing loan will be reduce, positive rivalry will drive the sector, rate of business graduating from micro to SME will increase, unemployment rate will reduce, expansion in the business will leads to exportation and foreign exchange.
            Having understand this, the CHALLENGES remains HOW TO SOURCE FOR DEPOSIT OR CHEAP FUND for mfbs.
            My Take: With present situation surrounding mfb in Nigeria, government can really take the steps in this direction, while strategy to mobilize deposit from Nigerians is considered on short and long term.

  2. I think why most Mfbs charge higher rate is because of a lot of factors; The first is cost of funds, most of the funds available to MFBS does not come cheap. This is why MFBs need cheaper funds. Secondly, operating cost. The cost of running business in this country is not cheap. Other overhead cost. And people that put down their capital will definitely be expecting ROI and would also want to expands their business. Also most of MFBs clients are vulnerable, anything that affects the owners will affect their businesses, in case of any loss the MFB have to bear the loss. When you considers all these scenario it will be difficult to reduced interest rate until competition for them to do it or government comes in. Remember, we the players in the industry still want an improve remuneration and welfare packages. Where do we get it from.

    1. Sunday, don’t you think if the interest on loan is reduced to 2% it will attract more entrepreneurs and SMEs to embrace loan products?
      If the MFB’s customer base increases (skyrockets), it will definitely result in increase in profit.
      Moreover, the default rate percentage will also reduce due to lower interest charges on loan and moderate repayments armotization schedule.
      What do you think about this?

      1. Reducing interest rate to 2% is not realistic except we want to deceive ourselves. You only talk about increase in customer base which is not enough yard stick to reduce interest rate. You need to critically look at the points I raised above.

          1. I can’t discuss my bank on this platform, but each bank have the way they treat admin charges base on their own policy. I have opportunity to have work at two different State MFB and the way they treat the admin charges is not too different except for some changes that are different.

  3. You are right I know that too.But the good once thus exist like AB Mfb,Accion,etc to mention a few.I love MFBs and a lot are yet to be achieved.If the real sustainability will be achieved,financial inclusion will hope may just be an illusion.

  4. hi,I like your writing so much! sure will communicate more about your article on AOL? I require an expert on this area to solve my problem. May be that’s you! Looking forward to see you.

  5. In real sense, microfinance loan is not cheap and it is only the government that intervenes in this matter.
    I know of some microfinance banks that government gives money for schools at a very lesser rate per year but this money is being released once or twice a year to the bank.
    I think that type of money from the government should also include small businesses and not school alone because when the students graduate and there is no industry to work in… Let’s say they had use part of the money to assist some smaller busineses way back, it should have at least employed some of our graduates in future.

    1. Ibidun,
      Could you be more specific or explicit on this statement:
      “I know of some microfinance banks that government gives money for schools at a very lesser rate per year but this money is being released once or twice a year to the bank.”
      This is a professional blog where fact is germane.
      I look forward to your response.

  6. Does your blog have got a contact page? I’m having a tough time locating
    it but, I’d want to shoot an e-mail. I’ve got some recommendations for the blog you may well be thinking about hearing.
    In any event, great site and that i anticipate seeing it grow after a while.

  7. Reducing the interest rate to 2% it wouldn’t work due to several factors, talk of operating expenses, admin. Cost and all other overhead cost…

    1. Anthony,
      Introducing 2% interest on loan can work if the Business Development dept and the Management are proactively innovative.
      It will yield a large customer base which will yield higher profits. Delinquent and Bad loans will be minimal. Hence; the PAR will be less than 5% (percent).

  8. I disagree with you sir. What determines the interest rate is the Mfb cost of fund which as we speak is very high. I think your focus should be on government creating the conducive business environment through infrastructural development.

  9. You have made some decent points there. I checked on the wweb for additional information about the issue and found most individuals will go along with your views on this website.

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