MFIs' Asset Pricing: A Critical Analysis
This paper critically examines the transformation of MFIs into for-profit institutions.
The main goal of MFIs when they first emerged was to alleviate poverty among susceptible population segments. Over time, however, MFIs started finding it difficult to remain sustainable while serving large numbers of poor people. Stakeholders are increasingly seeing them as profitable business opportunities. The paper states that:
- MFI sustainability is vital for them to continue serving poor people;
- MFIs need to charge an effective real rate of interest in order to achieve self-sufficiency;
- MFIs transforming into for-profit institutions encourages private operators who look for a financial rate of return;
- MFIs have started increasing their income by levying various charges and following dubious accounting practices;
- Most MFI borrowers are poor and illiterate women, who do not understand the financial terminology used by MFIs and are, therefore, unable to understand the true cost of microfinance.
The paper concludes that borrowers have a right to know the actual cost of a loan. It recommends that MFIs must make operations transparent. They must reveal effective interest rates, including all changes, using standardized and basic mathematics.