Can Microfinance Bankrupt Entrepreneurs?

Written by on December 8, 2009 in Featured, Microfinance - 4 Comments

microfinance

The threat of poor entrepreneurs taking on too much loan debt is a growing reality, and a genuine threat to the rapidly expanding microfinance sector. At Oikocredit’s annual staff and board meetings, regional managers who operate in almost 70 different countries, raised concerns over the rate of over-indebtedness in some countries. Those working in the field have witnessed that cases of over-indebtedness are becoming more common. Oikocredit board and staff agreed urgent action is needed and defined an action plan.

Microfinance has grown at a tremendous pace. This development has been applauded because microfinance allows poor people and small entrepreneurs to receive financial services they could otherwise not access. While some regions continue to struggle with inactive MFIs and an unmet demand for financing, others are experiencing the reverse.

Microfinance institutions (MFIs) must expand to become financially sustainable. As such, they aim for scale and strive to reach out to more and more clients. In some cases, especially with the entrance of profit driven actors, this leads to an increase in competition and results in institutions reaching out to the same clients in the same (often urban) areas.

Oikocredit Regional Directors reported stories of clients with loans by more than two, three or even five different microfinance institutions. The over-indebtedness of clients, and sometimes abusive collection practices, can often be a consequence of this multiple lending. As a socially-driven organization, Oikocredit is seriously concerned about the consequences of these developments for the microfinance industry, but more importantly for its end clients.

“Credit is a stepping stone out of poverty – as long as repayment is possible. If repayment becomes an insurmountable burden, a client becomes over-indebted. We do not want MFIs and their clients to fall into this trap. Organizations providing funds have an extremely important responsibility,” said Oikocredit Managing Director Tor Gull. Oikocredit board and staff decided to take a number of steps to counteract this negative trend.

1. Oikocredit field staff in 33 offices around the world will share our concern with the microfinance partners and seek actions to mitigate or prevent over-indebtedness.

2. In countries where Oikocredit finances MFIs and competition is increasing, staff will contact leading national and international organizations and networks. The negative consequences of competition can only be effectively solved through agreements on a national level and joint initiatives.

3. Oikocredit will contact other socially oriented investors to collaborate in tackling this issue.

With these measures, Oikocredit aims at stimulating dialogue among institutions and investors commited to poverty alleviation and the prevention of over-indebtedness.

Source: PR Newswire Image Source: Microfinance.fm

Erik

Erik is a perpetually curious social innovator. As a serial entrepreneur, Erik knows a thing or two about change. As a co-founder of SocialEarth, Erik hopes to channel his passion for social advocacy into an innovative venue of social awareness for others.

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