The Impact of Inflation on Microfinance Clients and its Implications for Microfinance Practitioners (2024)

FAQs

What is the most common risks in an MFIs and how it affects all microfinance institutions? ›

Most MFIs focus on financial risks, in- cluding credit, li- quidity, interest rate, currency, and investment risks. Credit risk is the risk to earnings or capital due to bor- rowers' late and non-payment of loan obligations. Transaction risk refers to the risk within individual loans.

Microfinance has an impact on economic growth both directly and indirectly. The direct impact of MFIs on economic growth may be estimated by analyzing the decrease in poor people and the rise in value produced by the disadvantaged and poor's entrepreneurial activities (Maksudova, 2010).

It is found that the foremost factors obstructing the adoption of microfinance are: lack of financial stability, uncontrolled growth, cultural and value impede, systematic frauds, bureaucratic obstacles, state intervention, methodological defects, and shortage of credit rating agencies.

The paper discusses some of the challenges to microfinance commercialization, such as inappropriate donor subsidies, poor regulation and supervision, and limited manage- ment capacity of microfinance institutions.

Inexperienced staff, questionable working practices, poor internal controls, substandard governance (Mersland and Strom, 2009; Hartarska, 2005) and inadequate management information systems all contribute to African MFI underperformance (CGAP, 2009).

Finally, microfinancing can also be a risky proposition for entrepreneurs. Because the loans are typically unsecured, there is a risk that the entrepreneur will not be able to repay the loan and will default. This can damage the entrepreneur's credit score and make it difficult to obtain financing in the future.

Microfinance can cause low-income people to become excessively indebted. Borrowers might take out several loans from several microfinance organizations, which could put them in a debt cycle and make it impossible for them to repay the debt.

Microfinance is controversial.

The worry is that large microfinance bankers will raise the interest rates on their microloans and push low-income borrowers deeper into debt because they can't afford to pay back the loans, plus big interest. Project Graafin, for one, has thought through this issue.

The theorised critical success factors were: adequate delinquency management, low cost of funds, adequate information management systems, shared mission, vision and values, employee motivation, decentralisation, and quality leadership.

Others allude to negative impacts (i.e., that microfinance does harm), such as the exploitation of women, increased or at best unchanged poverty levels, increased income inequality, increased workloads and child labor, the creation of dependencies and barriers to sustainable local economic and social development (e.g., ...

Is microfinance good for the poor? ›

Research funded by The World Bank examined the impact of three microfinance institutions in Bangladesh over a seven-year period and found dramatic decreases in overall poverty, with the highest impact on those families in extreme poverty.

Microfinance institutions have been accused of using exploitative lending techniques and charging usurious interest rates; and critics even question the ability of microfinance to alleviate poverty.

It identifies three major risks: 1) Financial risks, which include credit, liquidity, market and investment portfolio risks. Credit risk from borrower default is the most significant. 2) Operational risks from human/computer errors and issues with technology, resources, or fraud.

These risks are: Credit, Interest Rate, Liquidity, Price, Foreign Exchange, Transaction, Compliance, Strategic and Reputation. These categories are not mutually exclusive; any product or service may expose the bank to multiple risks.

Credit risk at the MFI level can also be influenced by over indebtedness among microfinance borrowers, given the lack of credit data available in the microfinance sector and the absence of credit bureaus in many countries. There also tends to be inconsistencies in the method of financial reporting by MFIs.

Market Risk – Market risk is the risk of financial losses and negative social performance related to changes in the value of an MFI's assets and liabilities. These changes as determined by fluctuations in interest and foreign exchange rates in the market.