Paper

Microfinance Institutions: Overcoming the Obstacles

How can MFIs minimize common problems through innovation and cooperation?
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This paper discusses three common problems that MFIs face, namely high interest rates, sustainability issues, and the ability to help poor people generate income. It considers various arguments regarding these problems and demonstrates how they could be minimized through innovation and cooperation. MFIs impose high interest rates on their loans to cover the high risk of lending money to the poor. They also often face liquidity problems. Some critics state that’ financial services provided by MFIs do not help the poor to generate income but drive them to indebtedness instead. The author responds to these criticisms by stating that:

  • Implementing the group lending model could help decrease default risk and the high loan costs of financing the poor;
  • Cooperation with larger financial institutions and improvement of products and operating efficiency could help MFIs reduce their dependency on subsidies and external support which reduce their sustainability;
  • Improvement in infrastructure and human resources would lead to more efficient operation;
  • MFIs can also provide basic business skills to clients to help them improve their livelihoods.