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Money TalksMicrofinance credit bonanza at a cost of mission drift

Microfinance credit bonanza at a cost of mission drift

It’s become normal in Addis Ababa for vehicle brokers to boast about being able to secure auto loans. It’s a strategy for attracting customers, but it also reflects the growing accessibility of credit to those who are commonly referred to as the middle class.

But this didn’t just appear out of thin air.

This is a result of the increasing role played by MFIs (microfinance institutions) in the financial sector. Credit to the market has reached an all-time high, with the number of MFIs having reached 41 by the end of the past fiscal year and another 40 in the process of being formed.

But there is a price to pay for this.

The interest rates that MFIs are imposing are unprecedented. The highest possible rate is 26 percent, which is over twice the national average for bank loans. The rate is expected to rise as resources become more expensive to mobilize.

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Although MFIs have never had a problem finding borrowers, this situation discouraged many from taking advantage of the financing opportunity they provided because of the difficulty in obtaining loans from traditional financial institutions like banks and credit unions.

“I was taken aback when I saw the loan agreement. I had second thoughts after seeing the 26 percent interest rate on the agreement,” claimed a lender who took 600,000 birr for a two-million-birr automobile. “It is very expensive.”

MFIs in Ethiopia charge substantially higher interest rates than their counterparts in neighboring countries. In Kenya, the average lending rate in 2022 will be less than 20 percent. Rwanda, Tanzania, and other East African countries have similar figures.

The outstanding credit of MFIs in Ethiopia amounted at 72.9 billion birr at the end of the previous fiscal year. They have around 5 million active customers. The five largest MFIs (Amhara (rebranded as Tsedey Bank), Oromia (rebranded as Sinqee Bank), Addis, Somali, and Dedebit) control more than 80 percenr of the MFI market. They are all affiliated with the state.

Nisir Microfinance, on the other hand, is among market leaders among private MFIs in Addis Ababa. Early this year, its outstanding credit topped one billion birr. According to Dawit Wakgari, the company’s CEO, it has now reached 1.3 billion birr.

Despite agreeing on the high interest rate, Dawit believes the MFIs have made significant progress in terms of credit disbursement.

“The lending rate appears high at first glance, but it comes with a high cost of mobilizing deposit,” Dawit explained.

According to Dawit, MFIs pay up to 17 percent on time deposits to meet client credit demand.

“The cost of mobilizing resources has reached its peak, becoming very expensive,” Dawit stated.

Other industry insiders concur.

Abdulaziz, the CEO of Ray Microfinance, is one of them.

“Not only is the cost of mobilizing deposits high, but so are the operating costs, because MFIs use a manual system,” the CEO explained.

The cost of mobilizing deposits is also high among banks. This explains why banks encourage people on the street to obtain bank accounts. With MFIs relying on banks and certain investors ready to save their money in time deposits, the lending rate among microfinance institutions has gone up.

“Sometimes, we take an 18 percent loan from a bank to borrow some of our customers,” Dawit continued.

Insiders in the industry, however, are concerned that the current practice among MFIs will cause them to drift from their mission of reducing poverty and increasing access to finance.

“Mission drift is clearly happening in Ethiopia now, though it may be beyond the MFIs’ control,” said an expert who has conducted numerous studies on the industry.

To boost their pool of resources, the expert advises MFIs to mobilize resources primarily from the general public.

Borrowing at a high interest rate and then charging another interest rate should not be their business model, according to the expert.

“Either they change their current market behavior or the central bank assists them in doing so by pushing the Development Bank of Ethiopia to offer some credit till they become financially sound,” the expert concluded.

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