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.