Ignorance weighs down access to loans

Limited knowledge about the products, costs as well as charges by financial institutions is halting access to finance for small and micro businesses, according to experts.

Wednesday, January 18, 2012
Market vendor. Women and the touth are the most financially excluded . The New Times / File.

Limited knowledge about the products, costs as well as charges by financial institutions is halting access to finance for small and micro businesses, according to experts.

Jessica Massie, a consultant with Microfinance Transparency notes that most borrowers lack basic knowledge about financial products offered by lenders, particularly bank charges, interest rates and the cost of a product.

 "In order to understand the true cost of their credit, clients must consider all of the charges that might be assessed before they finish paying off a loan,” she told Business Times yesterday

She noted that lack of knowledge about available financial products and services, inability to create and follow a budget, and lack of confidence in ability to set money aside undermines clients’ ability to make optimal use of available financial services.

"While clients are informed of all costs, and in principal know them, they do not see cost as a whole and often fail to consider what the loan will cost them until after they have already borrowed,” she said adding that very few people acquiring loans calculate total cost unless prompted to do so.

"I had not known why my bank charged me Insurance when there is nothing that happened on my loan, I found it one way these banks cheat us,” Damacien  Mugabo, cereal dealer said

Job Opar, a consumer protection consultant, notes that most people acquire loans without clearly understanding the costs incurred such as interest rate, insurance fees and penalties which increases the total amount to be repaid.

Recently a district recovery commission under the ministry of Justice was set up to follow up and recover non-performing loans worth Rwf1.3b, which is likely to minimize, loses to financial institutions.

However, Massie noted that there is need to roll out financial education to help people understand their loans, interest rates and terms and conditions from different financial Institutions so as they can ably choose from different products.

"Financial education is more effective when messages are heard, seen repeatedly, and the high level ownership of radios and mobile phones,” she said

Currently, banks and Microfinance institutions are rolling out mobile banking where clients receive updates through short Message Service (SMS) about the status of their accounts, which has eased the way people manage and payback loans.

dias.nyesiga@newtimes.co.rw