Today, microfinance has slowly developed to be a worldwide movement. Microfinance refers to the supply of financial services to the poor to improve their financial condition. Oftentimes, the word microfinance is used interchangeably with the word microcredit. Strictly speaking, microcredit is the extension of small loans to entrepreneurs too poor to qualify for traditional bank loans. Microcredit is a component of microfinance. Probably the most important component.

An effective tool against poverty and hunger, microfinance has been changing people’s lives for the better. Not through charity but by providing small loans to the poor. Upholding the credo of Muhammad Yunus, the founder of the Grameen Bank that credit is a human right; that every person has the right to credit to improve his/her livelihood.

One popular provider of microcredit loans are Non-governmental organizations (NGOs). More specifically, the NGOs are non-formal providers of microcredit loans.

On microcredit loans granted by NGOs, one may ask: Why are the microcredit interest rates charged by NGOs higher than the conventional commercial bank? Meaning, that the NGO microcredit is much costlier for a poor borrower than that of a commercial bank. Those who are familiar with the Ngo credit methodology/approach know the answer to this question. But not many are familiar with the NGO credit methodology.

Not many know that there is no collateral needed in microfinance loans. Unlike in a commercial loan where there is a collateral. More often than not, clients of microloans have no credit history. And they have low educational attainment. Some are illiterate, too. Since the clients of microloans often live in remote areas, there is cost involved in reaching their doorsteps and regularly monitoring repayments.

Also, NGOs normally conduct value formation seminars and entrepreneurial skills training for members who are prospective borrowers of funds. Commercial banks do not offer this service to poor borrowers. Microcredit loans are approved fast. These small loans do not usually meet the commercial banks requirements on borrower’s cash flows. The poor borrowers do not have to go to commercial banks, wait for long periods and mingle with better-dressed clients of the banks. These are psychological costs that the poor borrower does not incur if he borrows from an NGO in the countryside. No wonder poor borrowers prefer NGO credit to commercial banks. The NGO credit service is more personalized, with more intensive supervision and monitoring of the utilization of funds.

Here in the Philippines, the NGO microcredit practitioners charge interest that range from twenty-four (24%) to thirty (30%) percent annually computed monthly – usually two (2%) to three (3%) percent every month. The rate of microcredit interest, at its face value, appears to be higher than the interest rates charged by commercial banks. Not really. When we consider the so-called psychological costs that the poor borrower saves by not borrowing with the commercial bank. The wonder of it all is that the repayment/recovery rate of NGO credit is very much higher than the repayment rate of commercial loans. Here and abroad. Despite criticisms of high interest rates charged by NGOs. Highlighting the fact that the poor consider access to credit more important than the actual interest.

Incidentally, the interest rates charged by NGOs is still lower than the interest rates charged by the moneylenders of the “5/6 loan.” Some says that the daily interest of “5/6” loan amounts to a daily interest rate going as high as twenty (20%) percent.

There are cases where donor agencies or governments absorb some of the costs of credit for the poor. Subsidized interest rates so-called. In these cases, the microloan programs distort markets and generally suffer, low repayment rates, limited growth and institutional dependency.

Indeed, the NGOs are playing a major role for providing savings and credit services to the poor here in the Philippines and in other countries as well.

Have a joyful day!