Microfinance ... cost and value of borrowing

Dear Colleagues

A big part of the dialog about transparency in the microfinance sector seems to be about how a client is informed about rate of interest or cost of the transaction.

I have several problems with this. Why is the question so simplified? The goal, I would hope is for the client to be in a position to make the best decision, and this requires a sensible understanding of the transaction. An interest rate might help ... or the total cost of the loan might help ... or maybe it is something else.

Part of the something else is the very valuable intangible ... trust. A socially oriented microfinance operation is likely to have a relationship between the MFI agent and the client that includes trust.

As time passes, it is becoming more and more clear that automating microfinance in the interest of cost reduction and improved profit performance is going to end up removing much of the important training and mentoring that is associated with the social focus MFIs.

I rarely hear much reference to the educational level and literacy of the clients. How many of the poor clients are in a position to understand the concepts being debated by the MFI experts with college degrees? However, I would argue that poor people have a deep understanding of how best to handle their resources ... even if it is not expressed in terms that are commonplace on college campuses.

My impression is that the MFI community is on a slippery slope ... and has little idea of the potential for damage! It was bad enough with sub-prime in rich economies ... and maybe worse in poor communities when the MFI loses all its social purpose.

Peter Burgess