The Microfinance Institutions (MFIs) in Rwanda say that high interest rates charged by commercial banks are worsening their (MFIs) loan recovery, increasing fears that the high default rates among fund borrowers could ruin these institutions.
The microfinance sector in Rwanda has flourished for the last four years following the collapse of some MFIs in 2006, as a result of mismanagement of funds and losses suffered due to poor credit management practices.
This awakened the central bank to tighten regulations and so far this year, two other MFIs have been shut down.
The latest complaint by MFIs about high interest charges by commercial banks is partly a sign of limited funding options available to the juvenile industry.
And indeed if this situation continues given the fact that banks have not yet fully recovered from liquidity constraints, the percentage of the total loan portfolio in default will be exacerbated.
Statistics show that delinquency levels increased by four percent to 12 percent in the first semester of 2009.
Loan holders in MFIs are increasingly failing to honour their debt obligations to a certain extent, because of a general slowdown in economic activity, but also mainly due to high interest rates which are a result of expensive sources of capital.
By practice, a microfinance loan is granted to the customers of microfinance banks, such as peasant farmers, artisans, fishermen, women, senior citizens and non-salaried workers in the formal and informal sectors.
The loans are usually unsecured, but typically granted on the basis of the applicant’s character and the combined cash flow of the business and household.
And it is undisputable that the sector has become an invaluable tool for poverty alleviation.
This growth has increased demand for commercialisation of the industry, strengthening its correlation with the formal finance sector through adoption of modern sources of financing.
Traditional MFIs used to depend on NGOs resources but that was not sufficient to sustain the expansion of microfinance activity.
Most MFIs in Rwanda have shifted from that conventional approach, but still heavily rely on government financial backing for survival.
As the global economy stabilises and with the local financial industry recovering from external shocks, MFIs need to explore other funding options, like finding strategic investors who desire a return on their investment, but also want to contribute to a social cause.
MFIs also need to explore ways of taping funds from multilateral financial institutions, multinational corporations and the local and regional stock exchanges.
South Africa’s Blue Financial Services, which recently entered into the Rwandan market, is a leading example.
Blue, has a seven-year plan to enter 25 African countries and it is understood that the MFI determines its target countries by reference to guidance from the World Bank and the International Finance Corporation (IFC).
The IFC is also one of Blue’s shareholders with a five percent stake.
However, movement into this territory by local MFIs requires a strong internal strategy and organisation, plus good practices of corporate governance.
The writer is a Journalist