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Why Micro-Finance institutions are more innovative than banks

Updated on September 16, 2014
  • Group loans are mostly used by microfinance institutions a concept by nobel price winner Mohamed Yunus.
  • Most microfinance institutions face liquidity challenges. Thisakes them more innovative than traditional banks especially here in Kenya.
  • Target market for microfinance institutions is tje underbanked or those with no pay slips or collaterals for bank loans.

This hub is motivated by the heated discussion we had in class with a couple of classmates. Most of them are bankers and I suppose thats why they are taking the course. we see issues differently. The discusion was about reducing agency conflicts between shareholders and stakeholders and the point was that lien could be used by lenders to reduce ther risk of default which could otherwise cause agency dispute.

I work for a micro-finance institution in Kenya and I can tell there are challenges that we face. We engage in very risky business in an equally risky environment. Our focus is on the unbanked. We provide services for them. I see a Microfinance institution as a bank in its infancy with ni financial muscle always struggling to survive. I have seen established banks that started from microfinance instotuions offering credit to small businesses that can afford bank loans.

An established bank in Kenyas capital Nairobi
An established bank in Kenyas capital Nairobi

What we have done

We offer loans to groups of prople organized in groups. Mostly organized im villages and we have loan officers visit them every week train them on business management and give them loans that we expect them to pay. Most of these people are low incpmr earners and we expect them to be repaying their loans on weekly basis. The group acts a guarantee to each loan that goes to every member and we make them sign the loan form to ensure that none of them runs away.

This is what what banks dont do. We go out looking for these small businesmen and women. Banks wait for you to come and ask for a loan. Groups will ensure that none of the members fails to pay. To aboid running in to arrears they help each other to pay for the loans. We also ask the members to keep with us their savings and each member has to contribute each week. This creates the groups cah collateral fund which also acts as collateral for the loans that we give them.

Banks wont do that. They will wait for the salaried guys give them loans. What about those that are struggling to make their businesses a success buy lack the capital. Banks have nevet tjought of a creative way to help people out of poverty

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What do bank employees think

few weeks after I joined evening classes I met a new friend. He asked me where I work. I told him I work with a micro finance institution here in town. The I shared with him how we were facing liquidity challenges after we had so many loan applications than the hard cash we had. He told said if we do loan business then then we are regulated by the central bank. I said no we are not regulated by the central bank. We are regulated by the micro finance Act. He could understand how we offer loans without being monitored by the watchdog bank. I again told him we dont accept deposits. The later I came to realize that he had done actuarial science and not banking.

Most banks employ teachers and acturial science peolple to work for them. These are people with good training in the wrong fields. They will learn operations of the banks and unless they are interested in knowing more, they will remain to be there and never think of ways to change things. That is a major challenge for those working with large corporations. Working for a microfinance will expose you to the reality of people trying to create real wealth out of bare land. You will develop skills that will help you to come up with better ways of solving societal problems. Try being a loan officer. Read the other hub on being a loan officer in Kenya.

Many women work hard everyday in Africa to make sure that their families don't lack
Many women work hard everyday in Africa to make sure that their families don't lack

Other challenges

the issue is that every where ther are challenges and microfinance business like any other business face challenges. The major that I see everyday is literacy level of those clients. Most of the people askig loans have no idea on how they plan to use the loan. some even lie of the plans they have just to get the money and activities that do not generate any income for them. That is why banls cant lend to them. They lack a vision for theit lives and business as well.

The other challenge is the mismanagement. This is usually done by the rogue loan officers. Mismanaging groups and leading them to onvesting in people who sont have their intereats at heart. Microfinance institutions sometimes fall in thehand of greedy people who see this as an opportunity to male the poor poorer

general literacy levels and ignorance to law is again what makes microfinance inatitutions go down. This leads to bad loans being disbursed. Some loan officers disburse loans to non existent businesses. This multiplies portfolio at risk.

Personal Opinion

Banks in kenya ought to reduce over reliance on making profits and growth and focus more researching on challenges facing small business and helping by developing better models that favor all. And I mean a research not just an academic paper.

A better economy is made by improving the lives of those that are low. Its not making those who are able more and those that are unable more unable

banks have resources to organize seminars and forum within kenya and other developing countries and ensure that every one has access to banking services. Mobilr banking has really revolutionised banking in Kenya. Do you know that mobile banking idea is from telecommunications company and not a bank?

should go the way of microfinance institutions and leaverage the internet to raise cheaper funds. This will refuce interest rates and improve on the number of people accessing loans and doing more business

In short

  • MFIs are competing equally with banks.
  • banks complacent and enjoy so much providence.
  • MFIs can create sommuch knowledge which banks should copy. Copying is good. It makes the idea perfect
  • the internet is the next lending space. Banks have not realized. MFIs in kenya are utilizing it.
  • If you want an experience of dealing with poverty in Kenya look for an MFI. Forget about the banks


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