Microfinance institutions are primarily established to give out loans to poor and rural dwellers that the commercial banks do not deem fit to transact business with. The first person to put microfinance banking activity into practice is Professor Muhammad Yunus who, in the year 1976 gave out a micro loan to a poor villager with a contract that it would be paid back within 52 weeks with an interest rate that was much lower than what was obtainable from other sources in Bangladesh. A lot of microfinance banks have lived up to this responsibility over the years. A lot more however have failed. As a matter of fact, many have become defunct because they could no longer meet with the requirements set by the central bank. Some have engaged in endless litigation with the manager and the investor on a side, and the manager and the customers on the other side. why do microfinance banks fail? if you aim to invest in microfinance bank, you need not be skeptical as the market is very rife for the business. You need to be wary however of some pitfalls and try to avoid them.
Getting Loans Not Needed
As noted, microfinance banks are established to give out loans to retailers and small entrepreneurs. But they also get loans from the Central Bank to be able to fill this role. The Central Bank gives out this loan at a rate that will make it convenient for them to loan the retailers. Some microfinance banks go out of their way however to get additional loans from local commercial banks. When they resort to getting loans from such banks, the interest rate that offered is usually on the high side. Eventually, it gets burdensome to service the loans from Central bank and that from other local banks. This is usually the genesis of the problems that microfinance banks have afterwards.
Financing Big Projects
Again, we need to bear in mind that microfinance banks, as the name suggests, are expected to finance micro, small and medium businesses. On the average the standard is that the highest that microfinance banks can give as loan is between $4,000 and $5,000. There is bound to be a problem however when microfinance banks give out loans to big organizations and bankrolling projects worth millions of dollars. When this happens, the micro retailers get to suffer as their banks have decided to put all of its eggs in one basket. the resources that should ordinarily serve 200 individuals will end up in a person's coffer. The risk also will not be spread.
Doing Expenditures not Needed
Some microfinance banks keep forgetting that they are not commercial banks. They make this mistake when they feel that their managers and supervisors are qualified to use expensive cars as their counterparts in the commercial banks; when they think that they are suppose to earn as much as those in the commercial bank setting. A microfinance bank has made the mistake of establishing multiple branches in a period of few months. The management went as far as buying buildings in the commercial centers of a large city. They wanted to operate like a commercial bank, they ended up liquidated in just few months. When microfinance institutions make mistakes like these, they are bound to fail eventually.
Granting loans without collateral
Some customers do not merit any form of loan from banks, but microfinance bankers grant them loan based on personal relationships. Retailers get to relax knowing that their banker friends may not enforce measures that will harm them. Others seeking for loan present the facade of a strong organization with assets worth millions of dollars, microfinance banks representatives gets deceived. They recommend and grant loans without collateral and, eventually, they fail to recover the loan.
Some microfinance bankers do not verify the authenticity of cheques that are given. Apart from the fact these cheques are duds, some are outright fake designed with the intent of defrauding the bank. When such swindlers abscond, the problem becomes that of the bank. Even when they don't abscond, the burden of litigation against the culprit usually weighs the bank down.
Some microfinance bankers do not verify the authenticity of cheques that are given. Apart from the fact these cheques are duds, some are outright fake designed with the intent of defrauding the bank. When such swindlers abscond, the problem becomes that of the bank. Even when they don't abscond, the burden of litigation against the culprit usually weighs the bank down.
Unsatisfied Sales Agent
While the management of a microfinance institution may desire the best of cars and the best of pay for themselves, they usually forget the junior staffs. These ones are the foot soldiers of the organization representing the bank wherever they go. Sometimes they joggle the work of banker with that of a marketer. Sometimes they are loan officer as well as public relations person for the organization.
Most times, they serve as human vault bearing the risk of going about with cash without insurance. Unfortunately, they are the least satisfied. In terms of remuneration and working condition they are not properly motivated. With time, they see no need to continue with organizations that does not recognize them. When they change work, they break the link between the bank and the retailers recruited earlier.
Most times, they serve as human vault bearing the risk of going about with cash without insurance. Unfortunately, they are the least satisfied. In terms of remuneration and working condition they are not properly motivated. With time, they see no need to continue with organizations that does not recognize them. When they change work, they break the link between the bank and the retailers recruited earlier.
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