http://www.economist.com/news/finance-and-economics/21595470-tiny-loans-are-getting-more-expensive-poor-service
Far from the tall towers and flashy cars of Western financial centers, a new financial market is seeing a massive amount of growth and expansion, but not without cost. In the past few years 2 things have begun to happen at Micro-Finance Institutions around the world. The first is that the rapid expansion of MFIs has been much faster than the lenders who give them capital to expand have expected. While it is good that Micro-Finance is growing, giving millions access to resources they dearly need to expand, it does come at a price for customers. The abnormally high interest rates on micro-loans are getting higher as the cost of capital to expand is being passed onto customers.
While it is easy to say that the customers are better off than before MFIs because they used to borrow from money lenders at exorbitant rates like 100% or more, that misses the point. MFIs have become a major source of lending to many people as is obvious. What I'm curious about is whether the rising cost of MFIs and the rising default rate on their micro-loans will reintroduce the competition of informal money lender that so many poor people left behind. The presence of both an expanding legitimate market and an existing informal market presents an interesting dilemma.
Is it possible that competition from the "black market" might actually serve to drive down the interest rates of MFIs, or whether prices will keep on rising on an extremely vulnerable population?
Micro finance working should become more transparent and also the borrowers should be more educated before taking loans. When an institution gets the reputation of a MFI, it automatically gets a good reputation. There should be checks on these institutions as some MFI's run to make a business by exploiting the poor.The government should intervene and check whether the interest rates are justifiable or should have some control over the interest rates.
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