‘Coordination, refocusing MFIs purposes protect borrowers’

AMMAN — Better coordination among the government, the Central Bank of Jordan (CBJ) and microfinance institutions (MFIs) is key to preventing excessive hikes in interest rates and protecting borrowers, economists said on Sunday.

In interviews with The Jordan Times, several economists said interest rates imposed by these institutions on borrowers are “very high”, defeating the purpose behind them, which is supporting small businesses and enabling those who do not have access to finance to embark on income-generating projects.

“MFIs impose interest rates on their loans that could reach 20-25 per cent, which is unacceptable and very high… They impose high rates as, most of the time, borrowers do not provide any collateral,” Wajdi Makhamreh, an economist, told The Jordan Times on Sunday.

“Most of those who borrow from MFIs are very vulnerable and they are unable to get any sort of financing from banks and thus they accept taking loans with high interest rates. Better coordinating among the country’s agencies and the CBJ is much needed to ensure that no high rates are imposed on these borrowers,” Makhamreh said.

On Saturday, and in accordance with His Majesty King Abdullah’s directives, Prime Minister Omar Razzaz chaired a meeting to tackle the issue of “gharimat”, or indebted women. 

The meeting tackled the reasons leading to the escalation of the gharimat issue, ways to avoid the reoccurrence of the phenomenon as well as ways to help those affected, the Jordan News Agency, Petra, reported.

Razzaz instructed that all financial companies be subject to supervision by the CBJ, to prevent excessive hikes in interest rates and profits on loans as well as amending pieces of legislation that govern loaning to protect clients from drowning in debt. 

The discussions stressed on the importance of validating the financial solvency of borrowers and evaluating their ability to repay debts, whereby loan repayments must not exceed 30 per cent of the borrower’s income. Talks also affirmed the need for focusing on financing income-generating projects rather than loans for consumption.

“Most of the loans borrowers get from MFIs are spent on everyday needs and not on income-generating projects. There is a need for better monitoring of the process… when the loans are for income-generating projects, the interest rate should be low to encourage such projects and help create jobs,” Makhamreh said.

Zayyan Zawaneh, an expert in political economy, said the root cause of the problem lies in the high rates of poverty and unemployment, which forces borrowers who have no access to financing to accept to take loans from MFIs with high interest rates.

“The current model of MFIs in Jordan fits Western economies more than Jordan’s… From the 1960s up until the late 1990s, the Kingdom had very successful models for microfinance and it worked perfectly… Jordan had specialised MFIs for supporting workers in the agricultural sector, industries and even the handicrafts sector… these specialised MFIs received their funding from the CBJ and extended loans to borrowers at very low interest rates and that’s why they were successful in contributing to the development process,” he added.

Zawaneh noted that those who resort to MFIs do so because they have no other option to access financial services, “and MFIs takes very high interest rates”.

“The CBJ started a few years ago to monitor the process and more coordination and better monitoring is needed to put an end to this issues,” he told The Jordan Times on Sunday, adding that the majority of those who take loans from MFIs do so “to pay for some of their needs, such as paying for university tuition or helping some of their family members, and not for income-generating projects”.

“When these institutions are under the umbrella of the CBJ and its supervision, the issue of charging excessive interest rates will be curbed,” he added.

For economist Mazen Marji, one of the key problems is that most of the loans extended by MFIs are used for consumption purposes rather than financing income-generating projects.

There is a need for better coordination between the Ministry of Industry, Trade and Supply, the Ministry of Social Development, the National Aid Fund and the Development and Employment Fund, among other establishments, to focus on extending microfinancing for income-generating projects, Marji told The Jordan Times.

“There is a need for a clear definition of the role of MFIs as well, so that their concept is more focused on the segments of the community that are in need of support to generate an income,” he said.

Marji added that it is also necessary to educate and train borrowers on how to optimally use the financing.

“A large percentage of small business that receive loans from MFIs fail in a short period of time because they do not have experience in running a business and marketing their products or services,” Marji said, adding: “There is also a need for following up on the progress of their projects to ensure that they are on the right track.”