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 the 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 say 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 government 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. One NGO in our country providing microcredit loans and organized more than twenty-five (25) years ago has been extending a broad range of financial and complementary services to low-income groups. From a client base of 25 small entrepreneurs during its first year of operation in 1981, it is now servicing 149,020 clients in its present 67 branches. Ninety-nine (99%) of its clients are women.

Another Philippine-based NGO that started its operation in Iloilo City in 1986, has now a staff of 1,543 servicing a total of 231,536 clients in its 66 branches.

Do you know that there is a kind of microcredit interest-free program? It is not only interest-free but also has no service charge. I am referring to the unique microcredit program of Muslim Aid. Since 1993, Muslim Aid has been promoting its interest-free microcredit program in many parts of the world including Bangladesh, Somalia, Sudan, Sri Lanka and Lebanon.

Muslim Aid has developed a global network of humanitarian organizations and reaches almost sixty (60) countries.

The reason Muslim Aid does not charge interest is because Islam, the religion of Muslims prohibits transactions that involve usury or interest (Riba).

Muslim Aid has Board of Trustees composed of seventeen (17) respected members of the Muslim community. A professional staff is responsible for the management and operations of Muslim Aid at its London headquarters.

The Muslim Aid interest-free microfinance program is extra-lenient to the beneficiaries. The beneficiaries are allowed extension for repayments, if there is a need to. And if it appears that the beneficiaries are unable to pay, even with the extensions, then Muslim Aid writes off the loans altogether.

Indeed, Muslim Aid’s microcredit product is modeled on the Qur’anic principle of "Qard al Has" which means, "Beautiful Loan."

Have a joyful day!