There is so much financial support out here, but just a handful of SMEs are able to match the criteria. Financial support from MFIs is one of the best because unlike banks and other institution, their policies are less stringent. As an entrepreneur sourcing for finance to grow your business can sometimes be a necessity.
With the inception of MFIs, SMEs are more confident in borrowing from this institution because their products are streamlined to their needs. However, in as much as MFIs are structured to offer financial support to SMEs, a good number of them are not able to benefit from their products because. Here is why.
Lack of concrete financial records.
Some of the enterprises do not have financial records, which the MFIs can use to determine the credibility of their businesses so as to qualify for the loans. Poor bookkeeping, incomplete financial records, lack of bank statements and balance sheet can discourage an MFI from giving financial support to these SMEs.
2. High Default Rates.
A business idea may look viable, promising huge profits, only to collapse way before it picks up. Repaying the loan becomes a struggle for the SME, and without tangible collateral, the MFIs struggle to reclaim the lend money in full. This case is associated with adverse selection, moral hazard, and asymmetric information.
3. High-interest rates.
MFIs cannot differentiate a secure borrower from a risky borrower. To be on the safe side of the transaction, the Microfinance will put high-interest rates that will cushion them from defaulters. However, a secure borrower will be discouraged from getting a loan from an MFI because the interest rate is a little exorbitant.
4. Cost of borrowing capital.
In as much as the MFIs have access to finance from commercial banks and other institutions, the cost of getting that money is quite expensive, especially if the MFI is suffering from high default rates. To remain in the market, the MFIs will limit the number of loans they lend to borrowers or increase the cost of borrowing from them so that they are able to break even in case of a default. Some SMEs are not able to get enough loans from them because they loan limit has been reduced.
5. High cost of transaction.
It becomes extremely difficult for MFIs to deal with just a handful of SMEs because the cost of the transaction becomes high. Enjoying the economies of scale is a struggle for such institutions especially those in remote areas where they are few well established SMEs. For the first time, SMEs seeking loans from such MFIs will incur extra charges and fees just to secure the loans.
6. Rigid financial structure and systems.
In their line of operation, to maintain order, MFIs have some underlying rules and regulations that cannot be manipulated at the face of a potential borrower. If the basic requirements are not meant by the borrower, they cannot bend the rules to accommodate the entrepreneur regardless of his turnover or business acumen