Why are microfinance institutions showing major problems in portfolio quality?
Dritan Abazi, Prof. Dr. Donika Kercini
The history of microfinancing can be traced back as long to the middle of the 1800s when the theorist Lysander Spooner was writing over the benefits from small credits to entrepreneurs and farmers as a way getting the people out of poverty. The today use of the expression microfinancing has it roots in the 1970s when organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer Mohammad Yunus, where starting and shaping the modern industry of microfinancing
We have a question in this article:
What would be the appropriate strategy to cope with the challenge successfully? Before we answer the question we raised, first should identify the main causes affecting the deterioration of the quality of overdue portfolio.
One of the more opinions you hear these days is the financial crisis in the worldwide. We agree with this opinion but let we answer why financial crisis came? We have only one answer to this question:
Not appropriate credit methodology which has over debt clients with obligations and therefore the income can not afford the repayment of liabilities. We believe that the proper strategy to correct the performance of microfinance institutions should be the focus of improvement of the methodology, by giving power to the credit committee decision, which setting to balance three key variables, quantitative analysis, qualitative analysis and collateral for decision regarding the loan terms.
Should leave the decision surface being focused only on the client’s reputation or financial analysis, but should look deeper making sure we balance the three variables mentioned above to make wise decisions in favor of the customer and the institution.