Microfinance System is seen by the poor as an opportunity to prove themselves that, indeed, poor people are bankable.
In microfinance world, this opportunity is called as Self-Help Opportunity. This self-help opportunity is a derivative of one of the characteristics of the microfinance system,i.e., Self-Help Group (SHG).
Some critics of microfinance say that high interest rates discourage the poor from borrowing and also take away large portion of their income if ever they are able to successfully start a business.
However, “for a microentrepreneur, the cost of a microcredit loan represents a small proportion of total business costs. Studies conducted in India, Kenya and the Philippines found that the average annual return on investments by microbusinesses ranged from 117% to 847%.” (International Year of Microcredit, United Nations, 2005)
Thus, poor people–called microentrepreneurs–do not bother with the high interest rates as long as they have access to capital. This access to capital is their opportunity to improve their lives.
In fact, statistics show that MFIs can obtain repayment rates as high as 98.7%, even with high interest rates (McNelly and Dunford, 1998).
“The best judges of the value of microfinance are poor customers themselves. Their view of the matter is evident from their actions. When good microfinance services are offered, poor customers almost always take advantage of them.
Borrowers are willing to pay interest rates that cover the full cost of lending. Most importantly, the near-perfect loan repayment in well-run programs demonstrates how highly the poor value their access to loans: the main motive for repaying unsecured microloans is the clients’ desire to maintain access to future services.” (CGAP, World Bank Consultative Group to Assist the Poor, CGAP Annual Report, 2004)
High rates encourage people to exert more efforts in their businesses, since they still have to work harder to make profits, even after their loans are repaid. This is only their opportunity to have capital. Thus, they have to use the loaned fund as best as possible. Harder work usually pays off with higher success rate for the business.
Poor people knew that high interest rate could make their MFIs sustainable
On the other side, poor people knew that ” microcredit interest rates are set with the aim of providing viable, long-term financial services on a large scale. Microfinance institutions must set interest rates that cover all administrative costs, plus the cost of capital (including inflation), loan losses, and a provision for increasing equity. Unless microfinance institutions do so, they may only operate for a limited time, reach a limited number of clients and will tend to be driven by donor or government goals, not client needs.
“Why are microcredit interest rates higher than bank interest rates? Because the cost of making a small loan are higher in percentage terms than the costs of making a larger loan. The percentage cost of making microloans is even higher because clients generally have no credit history, no collateral, are frequently illiterate, and often live in remote areas.” (CGAP, World Bank Consultative Group to Assist the Poor, Donor Brief No. 6, 2002)
The poor are willing to pay higher interest rates to MFIs because MFIs are seen as the only ones that are willing to give them access to capital they badly needed to improve their lives.
You can become a Donor or Beneficiary
Having that said, you, who have excess capital can give some to the poor. Poor people, as you have seen, are willing to pay higher interest rates in lieu of their access to capital.
You may become a donor or virtual lender to these microentrepreneurs. For non-profit, visit kiva. For profit and with fare rate of return, visit microplace. 98% repayment rate is a sound investment, after all.
For Microfinance in the Philippines, you can visit the National Confederation of Cooperatives. This confederation is engaged in Microfinance Innovations throughout the Philippines.
Are you looking for some Microfinance Institutions? You can find some MFIs in your place at kiva. In the Philippines, you can visit the National Confederation of Cooperatives for some cooperatives that are engaged in microfinancing.
You can join them.