Poor loan repayment: Clients diverting funds for personal needs

Many Rwandans do not know how to invest the money wisely while others simply do not want to pay back Jeanette Nyirabera, a 38-year-old business woman in Rwamagana, managed to access credit worth Rwf500,000 from one of the new microfinance institutions in Kigali. Her aim was to invest in retail business such that her “Murakaza neza” shop can generate more profits. 
Clients at Zigama Credit Saving Society headquarter branch in Kimihura.
Clients at Zigama Credit Saving Society headquarter branch in Kimihura.

Many Rwandans do not know how to invest the money wisely while others simply do not want to pay back

Jeanette Nyirabera, a 38-year-old business woman in Rwamagana, managed to access credit worth Rwf500,000 from one of the new microfinance institutions in Kigali. Her aim was to invest in retail business such that her “Murakaza neza” shop can generate more profits. 

“I heard about the loans that the institution offers so I got the money but on reaching home, my child was very sick—I ended up spending almost all the money footing  medical bills,” she said.

Eventually the business collapsed—shuttering all her dreams of becoming a millionaire. To escape prosecution for failing to service her loan, Nyirabera relocated to another unknown village.

Today, she is one of the hundreds of thousands who have failed to service their loans in the country, thus contributing to the high non-performing loan portfolio percentages in MFIs.

In almost half the world, over 3 billion people still live on less than 2.50 dollars (Frw1, 366) a day, of which 80 percent are in Africa, a 2008 Poverty Facts and Statistics report conducted by the World Bank Development indicators shows.

Rwanda is among, with 60 per cent of her population in abject poverty, but so far, substantial progress in stabilising and rehabilitating the economy has been made since 1994.

Rwanda is considering financial penetration as a poverty reduction tool. In 2006, government launched a Financial Sector Development Programme (FSDP) as one of the strategies through which sufficient levels of savings and investment of 18 and 30 per cent respectively can be increased to contribute to the real Gross Domestic Product (GDP).

Since then, microfinance institutions have been promoted as a means through which many Rwandans’ lives can be transformed through access to credit.

So-far-so good—as this has given a chance to many Rwandans to depend on their own abilities however loan repayment remains a major challenge.

In a bid to strategise MFI’s as one of Rwanda’s poverty alleviation strategies, the Rwanda Development Bank (BRD) as the apex of all microfinance institutions, organised a one day workshop to discuss and find solutions to major set backs of the microfinance sector.

Today most MFI’s face a big problem of poor loan repayment from their clients. Participants attributed this behaviour to the fact that many people divert loan funds to meet their personal needs instead of using them for the proposed development need, just like Nyirabera.

“In such a case it becomes very hard for the client to pay back since the money has not been invested anywhere,” Francine Uhambajimana, a participant from Urwego opportunity microfinance bank said.

It was also noted that many Rwandans do not know how to invest the money wisely while others simply do not want to pay back.

Prosper Nyirumuringa, the Director of Microfinance Development and Financing Fund in BRD however, advised MFI management to introduce officers who will be responsible for following up on the actual spending of loan money such that the expected investment returns are realised.

“Loan officers should have multi-lateral skills to advise and follow up clients accordingly,” he added.

Microfinance institutions are a significant tool of poverty eradication because they go up to the rural areas and offer everyone a chance to access credit at affordable interest rates but until Rwandans learn to utilise the loans for development purposes, poverty alleviation will still remain a dream.

Gideon Kayinamura, also a Member of Parliament advises that it is important for clients and lenders to come to a roundtable and fully understand the transactions very well before loans can be disbursed.

BRD has so far mobilised over Rwf9 billion to facilitate MFI’s such that more Rwandans can be able to access credit and develop economically. It is therefore necessary that people access what they can pay back.

The financial penetration need has not been covered yet however with proper utility of available financial services many people will be able to access credit hence the loan interest rate will drop.

As Rwanda struggles to become a financial hub, financial services need to reach even the poorest, as a means of increasing savings and investments as these will uplift people’s standard of living thus cutting down the number of people living in extreme poverty.

MFI’s therefore must educate their clients on how to utilise the acquired loans. So far the Private Sector Federation has introduced business development centres through which business people can acquire this information.

Increased financial penetration will significantly increase per capita income thus accelerating Rwanda’s development.

Contact: keishaed@yahoo.com

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