Financial illiteracy triggers high default rates in MFIs

THE rising default rate by clients of Microfinance Institutions (MFIs) is a result of lack of financial education on the side of clients, according to industry experts.MFI clients are reportedly challenged with lack of knowledge on the cost of borrowing, determining interests due to their inability to interpret terms and conditions of their loan agreements.“Terms and conditions are not clearly explained to them, so people really don’t know what they are getting in loans,” said Jessica Massie, a consultant in the MFI industry.According to Central bank figures non-performing loans for MFIs increased to Rwf4.2 billion in December last year up from Rwf3.6 billion in 2010.“Financial soundness indicators of the microfinance sector indicated a slight detoriation on measured in terms of capital adequacy and Non- performing loans ratios,” the central bank monetary and financial stability stamen, which was released early this year states.Massie says that most MFIs do not take the initiative of explaining to the clients what the cost of borrowing would be and conditions applicable. Most clients of MFIs are low income earners whose literacy levels are low. “It is difficult for many people to understand interest rates and risks around the loan they are acquiring and because MFIs cannot explain to them, they end up taking loans that they cannot manage to pay back,” Gad Mugabo, an independent financial educator explainedHowever, Rita Ngarambe, the Executive Secretary of Association of MFIs of Rwanda (Amir) says that the increase is likely due to the reduction of total portfolio ratio after MFIs such as Unguka and Agaseke were recently upgrade into fully fledged banks.“The reason is because their (Unguka and Agaseke) amount of portfolio were removed,” she explained, saying that the recent campaigns geared towards financial education especially to the rural folks will help increase the saving culture and also speed up financial inclusion for all.Despite the high NPL ratio, MFIs showed a great performance last year on the basis of assets, deposits and loan portfolio.Last year MFI consolidated assets grew to Rwf48.2 billion up from Rwf43 billion the previous year while gross loans surged to Rwf37.8 billion from Rwf32.3 billion as and deposits rose from Rwf23 billion to Rwf24 billion.

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Financial illiteracy triggers high default rates in MFIs