MFIs need to improve their risk management practices

Most Microfinance Institutions (MFIs) in the country fail to lend money to individuals and small businesses due to a long and costly process of assessing the borrowers’ creditworthiness, a top official has revealed.Rita Ngarambe, the Executive Secretary Association of Micro Finance Institutions of Rwanda (AMIR) says that most micro finance institutions find it challenges to carry business assessment if the operator is applying for a small loan.“There is a risk in running microfinance business because doing a detailed due diligence of small business operators applying say Rwf50,000 is not easy,” she told Business Times in an exclusive interview last week.With their operating environment, which is composed of clients with low and unstable stream of income, MFIs are always challenged by micro transactions that tend to increase costs.“It takes tough decisions for MFIs to be sustainable financially because managing small loans portfolios is a big challenge,” she noted.She noted that; “For small loans when there are big numbers of clients, it becomes a significant risk to the MFI since there is no collateral apart from social guarantee,” she warned.Moreover, more clients are applying for too much money even as the default rates remain high. This hurt the liquidity flow of MFIs. “These businesses grow more loans yet their businesses are not growing, so the cash flow tend to be lower than the amount needed to be repaid, which leads to non-repayment of loans,” she addedNevertheless, MFIs have also devised solutions to overcome such challenges through designing loans with short term repayment terms.MFI clients say that the high default rates are a due to hidden interests charges that MFIs tend to charge.“It is always hard to understand charges these MFIs charge on every loan they give out and most of the times you find you have not put them into consideration while asking for a loan,” Emmanuel Byamukama, who is client of one of the MFIs said.Remy Iyikirenga, the Savings Coordinator and Promotion Specialist at the Ministry of Finance, is optimistic that with intensifications of financial education, clients will be able to fully understand loans, saving and also be able to use financial Institutions to access credit.

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MFIs need to improve their risk management practices