Microfinance Lending Practices

India's microfinance sector is facing increasing challenges such as dwindling funding, rising credit concerns, and tighter regulatory scrutiny, Raghu Mohan reports for Business Standard. Lending to Microfinance Institutions (MFIs) has dropped 55% year-on-year to ₹58,109 crore in FY25. This decline is reflective of lenders’ growing unease over asset quality, over-leverage, and repayment risks. The overall loan book has shrunk 17% annually to ₹3.59 trillion, even as the Reserve Bank of India’s (RBI) responsible-lending norms take hold. “Given the focus on financial inclusion, this (funding) has to be addressed as over 6 million borrowers are without access to formal credit," says Manoj Kumar Nambiar, Managing Director of Arohan and chairperson of Microfinance Institutions Network (MFIN). The crunch comes amid election-related risks in states such as Bihar, Tamil Nadu, Assam, Kerala, and West Bengal, which together account for 42% of the microfinance portfolio. Political loan waivers and coercive-lending curbs have disrupted collections, while recent state laws aimed at protecting borrowers have deepened confusion, the report suggests. Although the RBI eased asset norms in June, cutting qualifying asset requirements to 60% to allow more diverse lending, stress levels still remain elevated. Several efforts are being made to rebuild confidence. The RBI is considering giving not-for-profit Section 8 MFIs access to credit bureaus. Self-regulatory body Sa-Dhan has also launched a credit awareness drive with TransUnion Cibil. Deeper structural reforms — including grading-based funding, partial credit guarantees, and a unified umbrella body for MFIs — are needed to avert a credit squeeze, according to experts. “The sector has to be reimagined and break out of cycles of overleveraging and stress,” adds Sumita Kale, Chief Executive Officer at Indicus Foundation. ✍ : Nakul Ghai 📷 : Getty Images Source: Business Standard: https://lnkd.in/gk4S_g5u #Microfinance #Credit #RBI

The Central Bank of Egypt gave banks a direct order. 25% of your lending goes to small businesses. That was 2015. Ten years and three deadline extensions later: 7%. Not 20%. Not 15%. Seven percent of total bank lending reaches MSMEs. Out of EGP 8.4 trillion in credit facilities. After the target was raised to 25% in 2021. After the compliance deadline was extended from 2022, to 2024, to 2025. S&P Global confirmed the number. The CBE’s own data supports it. This is not because the money does not exist. Bank credit hit an all-time high of EGP 8.4 trillion by Dec. 2024. Roughly half flows to government securities and public-sector lending. Of the remainder, large corporates dominate. The kiosk, the pharmacy, the workshop, the food cart: structurally invisible. The IFC estimates Egypt’s unmet MSME financing demand at $43 billion. After devaluation, a 2023 update placed it closer to $71 billion. The Credit Guarantee Co. of Egypt looked at this from the borrower side. Of two million MSMEs eligible for bank financing, 400,000 receive loans. 80% get nothing. The reasons are structural, not behavioral. Egyptian banks require collateral averaging 296 to 317% of loan value. The MENA average is 203%. The World Bank Enterprise Survey found only 4% of Egyptian businesses with 5 to 19 employees have ever taken a bank loan. The MENA average is 20%. Tunisia: 12.9%. Morocco: 11.3%. Egypt: 4% Egypt, the largest economy in the region, at the bottom of its peer group. The 1.6 million merchants who do not qualify finance inventory the way their grandparents did. Supplier credit at 5 to 20% markup. Microfinance at effective rates of 30 to 50%. Gameyas. Family. Or nothing. Egypt’s non-bank microfinance sector reached EGP 101 billion serving 4.1 million clients by mid-2025. Genuine progress. Against a $43 billion gap, a fraction. Now here is what should change the conversation. India faced the same problem. 63 million MSMEs, only 14 to 16% with formal credit access. India did not solve it with mandates. It built the data infrastructure that made merchants creditworthy. The Account Aggregator framework linked 120 million financial accounts and enabled $19 billion in new lending in a single year. 1.32 million first-time MSME borrowers in 2025 alone. Kenya took a different path. An overdraft product built on mobile money data disbursed $7 billion in 2024 to 33.4 million users. No collateral. No branch visit. No 300% guarantee. Just a transaction history. Egypt is generating this data right now. Every InstaPay transfer. Every wallet transaction. Every POS settlement. Each one a credit signal for a merchant who has never had a credit score. The gap between a merchant with zero credit history and a merchant with a working capital line is not a bank branch. It is a transaction record. Egypt does not need another deadline extension. It needs to turn the payment data it already generates into the credit infrastructure its merchants have never had.

Microfinance began with one promise - credit for the smallest borrower. Today, those very borrowers are being left out. The ₹50,000 loan isn’t what it used to be. Defaults are rising, NPAs have touched 16%, and the sector shrank 17% YoY to ₹3.59 lakh crore* So lenders are shifting. Fewer risky small loans. More focus on larger, “safer” borrowers. On paper, it looks rational. On the ground, it’s shutting rural families and small businesses out of credit, the very people microfinance was meant for. ₹50,000 was: → To buy a cow and sell milk → To stock seeds for a season → To keep a kirana shop afloat Take away that and you don’t just tighten credit. You cut off livelihoods. Financial inclusion was built on tiny loans that kept millions moving, not on big cheques. Now the sector faces a trade-off: protect lenders from defaults or protect borrowers from exclusion. Because when affordable credit disappears, borrowing doesn’t stop. It just moves to the wrong places.

Last week, a SACCO manager told me: "Our best performer is also our biggest problem." Here's what she meant: James disbursed KES 12M in loans last quarter. He won "Top Performer" three months running. He got a bonus, a certificate, and a standing ovation. Six months later? 45% of his loans are in default. But here's the thing,we created James. Most microfinance institutions reward ONE thing: Volume. → How much did you disburse? → How many clients did you onboard? → Did you hit your target? Nobody asks: → Are those clients still paying? → Did we lend to the right people? → Will this portfolio be healthy in 6 months? We're basically paying people to create problems for us later. I'm not saying growth is bad. I'm saying growth without accountability is expensive. Think about it: Would you rather have: A loan officer who closes 100 loans with 70% repayment rate, OR A loan officer who closes 60 loans with 95% repayment rate? Most institutions celebrate the first one. Smart institutions promote the second. Here's what I've seen work: → Tie 50% of bonuses to repayment performance (not just disbursement) → Make loan officers follow up on their own loans—if you approved it, you collect it → Celebrate quality stories, not just numbers ("Sarah has 98% repayment across 80 clients") The goal isn't to slow down growth. The goal is to grow sustainably. Because a Ksh 50M loan book with 5% defaults is worth more than a Ksh 80M book with 20% defaults. Your portfolio tomorrow is shaped by what you incentivize today. Simple question: Are your sales targets creating growth or just creating problems? Drop your experience below. 👇 Wishing you a productive week ahead. #Microfinance #SACCOs #FinancialInclusion #Leadership #CreditManagement #SustainableGrowth #EastAfrica

Non-Performing Loans Don’t Lie—They Reflect Our Lending Culture I still remember a moment from years back at Mkombozi Commercial Bank. A supervisor looked at a file, shook his head, and said: “Paul, this loan didn’t fail because the client was weak. It failed because we didn’t follow through.” That stuck with me. Because over the years, I’ve seen the same pattern repeat—across banks, teams, and markets. In my 10+ years of banking and microfinance, I’ve learned one thing the hard way: 👉 NPLs are not just about clients failing to pay. They’re often about how we, as bankers, choose to lend, monitor, and engage… Let’s break it down clearly: ✅ 1. NPLs Are Mirrors, Not Just Metrics They reflect our lending habits, our assumptions, and sometimes… our shortcuts. If we approve loans without deep understanding or follow-up, the risk begins there. ✅ 2. Weak Monitoring = Silent Defaults A loan that’s disbursed and forgotten is a loan waiting to default. Regular check-ins, business reviews, and emotional connection matter more than we think. ✅ 3. Cultural Red Flags in Lending 👉🏻Approving loans just to hit monthly targets 👉🏻 Ignoring early warning signs like missed calls or delayed payments 👉🏻 Over-relying on collateral instead of understanding the client’s business 👉🏻No post-disbursement engagement—just “wait and see” 👉🏻 Lack of borrower education or financial literacy support ✅ 4. What a Healthy Lending Culture Looks Like 👉🏻Lending based on character, capacity, and relationship—not just paperwork 👉🏻Regular follow-ups with empathy, not pressure 👉🏻 Educating clients before and after disbursement 👉🏻Treating recovery as a chance to rebuild—not just collect 👉🏻 Celebrating clients who recover and grow not just those who pay on time ✅ 5. Relationship Banking Is the Cure Strong relationships reduce NPLs. When clients feel seen, heard, and supported—they speak up before things go wrong. ✅ 6. Time to Reflect, Not Just Recover Before we blame the borrower, let’s ask: 👉🏻Did we educate them well? 👉🏻Did we monitor consistently? 👉🏻Did we build a relationship or just a transactions ✍️ Final Advice to Relationship Managers, Officers, Recovery Teams and Credit Analysts: ✅ Don’t wait for default—engage early ✅ Track soft declines and follow up with care ✅ Blend data with emotion—know your client’s reality ✅ Educate before you escalate ✅ Treat recovery as a second chance, not a punishment ✅ Build trust, not just targets ✍️Let’s build a lending culture that prioritizes wisdom, empathy, and sustainability. Because numbers don’t lie—but they do speak. Loudly. Found this insightful?,Please like, comment and repost so others can learn Paul Chengula 📞 0714 260266 |0769 218125 📧 pauloignaschengula@gmail.com Tanzania

Microfinance’s False Promise and the Quiet Harm It Can Do to the Poor For years, microfinance has been sold as one of development’s great ideas: give the poor credit, and entrepreneurship will do the rest. Poverty, we were told, would exit through enterprise ..not charity. It is an attractive story. It is also deeply misleading. Because every few years we witness a crisis in the MF industry, massive write offs a few closures and the government and regulators rushing to save the myth .. A large body of academic research, including randomized controlled trials across India and elsewhere shows that microcredit does not reliably increase incomes, reduce poverty, or create sustainable enterprises. At best, it helps households smooth consumption. At worst, it deepens vulnerability through debt. The uncomfortable truth is this: most microfinance borrowers are not entrepreneurs. They are poor households managing volatility .. illness, school fees, food insecurity. Loans are used for survival, not growth. The “businesses” they run are often low-return activities where profits barely exceed daily wages, let alone interest rates of 20–30%. High repayment rates are often cited as proof of success. They shouldn’t be. Repayment reflects discipline and pressure ; social, institutional, and psychological ..not prosperity. Families repay by cutting consumption, pulling children out of school, or borrowing again. Repayment is not impact. India has already seen where this illusion can lead. In Andhra Pradesh, rapid and poorly regulated expansion of microfinance in the mid-2000s and again around 2010 led to multiple lending, over-indebtedness, coercive recovery practices, and borrower distress. The political backlash including a near-shutdown of the industry; almost destroyed microfinance nationwide. Repayment collapsed overnight, not because borrowers suddenly became dishonest, but because the social contract had broken. This was not an accident. It was the logical outcome of an industry optimised for loan growth rather than livelihood creation. Contrast this with what does work for the poorest. Graduation programmes..combining assets, skills, mentoring, savings, and time ..consistently outperform standalone microfinance on income, resilience, and dignity. They recognise a basic truth: credit cannot substitute for capability. For many households, even modest, stable jobs do more to reduce poverty than fragile self-employment ever can. Microfinance is not evil. But it is dangerously mispositioned. Its rightful role is as financial infrastructure .. savings, payments, insurance, emergency liquidity, and credit only when capability exists. When credit is oversold as empowerment, it becomes a moral hazard. The hardest question the sector must confront is this: If an intervention repeatedly fails to deliver the outcomes it promises, does scale make it virtuous ..or merely louder? For the poor, false hope can be more damaging than no hope at all.

There are growing concerns surrounding the sustainability of the Joint Liability Group (JLG) mechanism in microfinance, particularly drawing from recent experiences. The sustainability of JLG can be at risk if it rigidly adheres to a standardized approach that lacks flexibility for borrowers. Factors like uniform loan sizes, identical EMIs, simultaneous maturity dates, fixed pricing structures, and mandatory cross-selling practices could impede its sustainability. It is vital to adapt to the evolving needs, capabilities, and preferences of customers, necessitating a more flexible approach. Each borrower has unique requirements, cash flow situations, and credit histories, highlighting the importance of tailored solutions. The core purpose of joint liability should be to offer support to fellow members during short-term challenges rather than solely holding them accountable for willful defaults, fraud, or unexpected crises. Moreover, sustainability is compromised when expecting attendance at meetings is mandatory irrespective of the loan officer's presence. Borrowers are seeking customized products, efficient processes for transactions, fair pricing models, and services that uphold their dignity. In my view, JLG can enhance its sustainability by integrating these critical considerations. To secure the longevity of JLG, practitioners should proactively respond to changing customer needs, avoid placing excessive burden on borrowers, and recognize the significance of borrower sensitivity towards these key aspects.

𝐓𝐑𝐔𝐒𝐓 𝐎𝐑 𝐑𝐈𝐒𝐊? 𝐒𝐭𝐫𝐢𝐤𝐢𝐧𝐠 𝐭𝐡𝐞 𝐫𝐢𝐠𝐡𝐭 𝐛𝐚𝐥𝐚𝐧𝐜𝐞 𝐢𝐧 𝐦𝐢𝐜𝐫𝐨𝐟𝐢𝐧𝐚𝐧𝐜𝐞 𝐥𝐞𝐧𝐝𝐢𝐧𝐠 In microfinance, relationships play a crucial role in building trust and growing business. Directors often bring in clients they personally know, friends, family, or long-time business partners. While these connections can foster business growth, they can also pose risks when personal ties influence lending decisions. Unfortunately, some loans are approved based on personal ties rather than financial health. In some cases, borrowers leverage these connections to secure funds, only to divert them elsewhere or delay repayment putting the institution at risk. A strong credit culture is built on systems, not sentiments. While relationships can open doors, they should never override sound risk management practices. Here’s how microfinance institutions can strike the right balance: 𝐈𝐧𝐝𝐞𝐩𝐞𝐧𝐝𝐞𝐧𝐭 𝐂𝐫𝐞𝐝𝐢𝐭 𝐀𝐬𝐬𝐞𝐬𝐬𝐦𝐞𝐧𝐭𝐬: Every borrower, whether familiar or not, should meet the same rigorous credit criteria. 𝐂𝐥𝐞𝐚𝐫 𝐋𝐨𝐚𝐧 𝐌𝐨𝐧𝐢𝐭𝐨𝐫𝐢𝐧𝐠: Regular tracking ensures that funds are used as intended and repayment stays on schedule. 𝐅𝐢𝐫𝐦 𝐛𝐮𝐭 𝐅𝐚𝐢𝐫 𝐑𝐞𝐜𝐨𝐯𝐞𝐫𝐲 𝐌𝐞𝐚𝐬𝐮𝐫𝐞𝐬: Relationships should not shield borrowers from accountability. A robust collections strategy ensures long-term financial sustainability. Ultimately, the best way to preserve relationships in lending is through responsibility and discipline because a failing institution benefits no one.  Have you encountered situations where relationships influenced lending decisions? How do you think institutions can better manage this challenge? #riskmanagement   #businessrisk #financeindustry #microfinance

There's been a debate whether lending is good for emerging markets. Some VCs have already stopped backing startups with lending products. Here's my take. Microlending can be a lifeline for low-income entrepreneurs looking to build businesses and support their families. Studies show microloans increase incomes by an average of 9% - not an insignificant amount when living near the poverty line. Providing capital empowers people to invest, grow, and climb the economic ladder. But we have to balance optimism with caution. Interest rates on these loans often exceed 50% - 100% per annum. And when loans can't be repaid, things get messy quickly. Default rates in some emerging market microlending programs approach 35% (fraudulent loans aside). Families take on crushing debt. There are reports of people being beaten up, fake obituaries and harassments of all sorts when installments come up short. There’s also a question of whether the best way to feed the poor is to give them fish or teach them how to fish. More appropriately, in a pond with little, do we ration the fish or build inroads to the sea where there’s more fish? Why don’t we find more of the latter? There is a much bigger and ethical opportunity in financing businesses and industries as well as micro-infrastructure finance. One can lend to fit hospitals and shared-usage facilities with equipments needed to raise health levels. Manufacturing, creative, fashion hubs need machines to be globally competitive and individuals with loans that almost always deliver attributable long term economic progress. The business model can also vary from equipment financing, to cluster financing or no-collateral pay per use lease model. There’s probably hundreds of startup opportunities here to digitize and finance industries and hubs at same time here. I call this “fintechization” of industries. With fintechization of industries, you will be lending to a homogenous type of customer with similar processes and similar challenges. This makes KYC easier, underwriting less risky and faster and your loan book easy to model. Some business models also KYC and collaterize by default. There is also opportunities to do backward and forward integrations into derivative services. We’ve had some early movers here - Moov imho is a lender in mobility. MKopa in solar and phones. Fast Forward Venture Studio has researched 40+ sectors and sub-sectors that can be “fintechized” with sustainable business models. Overall, it’s about finding a balanced approach that makes capital accessible to do the work of advancing society. Impact investors and ethical lenders have a role to play here. It is very important that the world lends with care. Are you a lender or investor looking to tap into fintechization opportunities, Fast Forward Venture Studio is happy to connect you to founders and companies building for those spaces. Reach out and let’s talk. Image credits: FSD

🎯 Microfinance Myths: Why High Repayment Rates Can Hide a Failing Portfolio 🚨 “Your Portfolio Isn’t Performing. It’s Hallucinating.” The Most Dangerous Loans in Microfinance Are Often the Ones That Repay Perfectly. → Collection rate: 99% → Portfolio growth: aggressive → Investor reports: optimistic → Board presentations: reassuring Everyone applauds. →The CEO celebrates expansion. →The Board praises “financial inclusion.” →Investors admire repayment discipline. And somewhere in that applause… an exhausted borrower takes a new loan to repay the old one. Again. And again. And again. Until the entire portfolio becomes a beautifully organized lie. 🎭 The Industry’s Favorite Illusion: “High Repayment = Healthy Portfolio” Let’s say the quiet part out loud: Some microfinance portfolios are not financing entrepreneurship. They are financing the appearance of repayment. That’s the scandal nobody wants to discuss. Because the moment repayment becomes the religion… truth becomes negotiable. → A borrower repays. → The system records success. → Another loan is approved. But almost nobody asks: “Did this loan improve the client’s economic reality… or merely postpone their collapse?” That distinction changes everything. 🧨 The Hidden Machine No One Audits Properly I once reviewed a fast-growing lending portfolio praised across the region for its “exceptional repayment culture.” On paper: ✅ Strong collections ✅ Low PAR ✅ Rapid expansion ✅ Delighted stakeholders But field visits told a different story. Borrowers were: →taking loans from competitors to repay existing debt →borrowing through relatives to avoid exposure limits →joining multiple lending groups simultaneously →selling household assets just to maintain “good standing” One woman summarized the entire system in a single sentence: “If I stop borrowing, I stop surviving.” That was the moment the truth became unavoidable: This was not financial inclusion. It was debt choreography. 🧠 Why the System Rewards the Illusion Because the industry often measures motion instead of sustainability. 1. Repayment Metrics Create False Comfort The sector became addicted to collection ratios. Why? Because repayment is easy to present: →clean →numeric →investor-friendly But repayment alone proves almost nothing. A borrower can repay: →by refinancing elsewhere →by liquidating assets →by entering informal debt cycles →by sacrificing future survival for present compliance Yet the dashboard still flashes green. 📌 Sometimes a 99% repayment rate is not a sign of strength. It’s a sign nobody is looking deeply enough. 👉 Full article continues in the comments 👇 #Microfinance #CreditRisk #RiskLeadership #OperationalRisk #FinancialInclusion #ERM #RiskCulture #Governance #LendingRisk #PortfolioRisk #RiskManagement