CRDB Microfinance Services Ltd: Common problems faced by grassroots financial intermediaries

Common problems faced by grassroots financial intermediaries

There is a vicious circle of constrains, which keeps the trust and confidence in grassroots financial intermediaries low. One of those constraints is the lack of strong leadership and governance, which has frequently led to the collapse of many such institutions. Because of the fear of losing valuable savings, many people who can potentially benefit are reluctant to buy shares or entrust their savings to these institutions; and because of this fear, these intermediaries are normally under capitalized. Furthermore, because they are under capitalized, these intermediaries are commonly unable to honor cash withdrawals or give loans on demand, which again erodes the confidence and trust of their would-be customer/share holders.

 

Lack of adequate capacity to assess and manage credit risk is also another common problem faced by the grassroots financial intermediaries. Due to poor risk management, the capital base of grassroots financial institutions is commonly narrow, thereby diminishing their capacity to lend or honor cash withdrawals. Similarly, the lack of capacity and week capital base often forces most grassroots financial intermediaries to offer very limited product range, thereby leaving them unattractive to a broad segment of the rural population. Other problems, which feed into one another and undermine the capacity of the grassroots financial intermediaries, include poor accounting and record keeping because of the lack of professionally trained staff.       

 

Last Updated: Wednesday, 18 February, 2015