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Why lending rates are high in microfinance banks — Operators

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By Providence Emmanuel

CHIEF Executive Officers of Microfinance Banks (MfBs) have attributed the high interest rate charged by the banks to the high cost of doing business in the sub-sector.

Speaking to Financial Vanguard, the chief executives noted that unlike commercial banks, MfBs don’t have access to cheap funds, and they also spend more resources per customer than what commercial banks spend.

Taiwo Joda

Managing Director of Accion MfB, Mr. Taiwo Joda, stated:  “When you say high interest rate, it must be put in context; high interest rate of what? Do you know that the amount of resources you put into serving a customer that wants N20,000 is the same amount of resources commercial banks would put in serving a customer that wants a N100 million.

“Most of the customers that we serve are not in the mainstream banking. There are a lot of physical interventions; so the administrative cost of MfBs is very high. It is quite labour intensive. Accion for instance, has over a thousand staff. If you look at that on one angle, you will see that because of the high cost, the cost of doing business is very high. That tends to mirror the kind of charges we give to our customers. Secondly, the funds are not coming as they should because of several things that the government wants and so what is left is that we need to be able to borrow money from other financial institutions.”

On its part, Managing Director/CEO, NPF MfB Plc, Mr. Akin Lawal, noted that one of the factors responsible for the high interest rates charged by MfBs is low public confidence in the subsector. He stated:  “If you are bringing money to MfB, the cost of that fund is already high and by the time I add my overhead and the deployment of overheads, which is higher than what obtains in commercial banks, because we do a lot of collateral substitute and I need to do so much supervision and these increase my cost.”

Managing Director, Supreme Microfinance Bank, Mr. Jide Aremo, explained: “Interest rate in the sub sector is high but it will not be high for ever. There was a time when we were charging ten to fifteen percent, but hardly will you see anybody charging ten percent now. They are charging six, five or four percent a month. Although there are some MfBs who have a good source of funding who are charging about 3.5 percent or 2.5percent.

“It is a question of the cost of funding and then the cost of running a MfB. It is much more expensive to run than the commercial bank because they want you to go to the grass root where people will demand for transport money every day. Spending such money on a daily basis is huge and the MfB bears such cost. So it is all these costs that build into the interest rate.” Managing Director, Fortis Microfinance Bank, MfB, Plc, Mr. Tiko Okoye, said that interest rate in the industry is usually higher than in  the commercial banking sector because they (commercial banks) have access to very cheap savings deposit which MfBs have not been able to  access.

“People prefer to save money in the commercial bank than in the microfinance bank but when they need substantial money or micro credit loan to do something, they will not have any other bank to give them the money than the MfB. If people put their money into microfinance bank, then the interest rate will be lower because the bank can give out loan at cheaper rate to those who need the money. They (MfBs) have to raise interest rate  in order to cover their cost and maintain little profit.”

Meanwhile, Managing Director, Asha Microfinance Bank Limited, Mr. Aminul Haque Bhuiya, said interest rate in Bangladash is lower than in Nigeria. “We collect 2.5 percent per month from our customers and beside this we are not collecting anything more. But most MfB collect more than that. This rate is for targeted clients or customers who are not very rich, so we consider such customers in terms of how we can reduce the interest rate. It is very important for our targeted clients.”


The post Why lending rates are high in microfinance banks — Operators appeared first on Vanguard News.

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