Consumer Credits for the Poor - Risk or Opportunity?

This paper builds a case for MFI consumer lending.

Traditionalists in microfinance associate consumer lending with provoking client indebtedness and usurious business practices. While microcredit finances poor people’s entrepreneurial income-generating activities, consumer credit does not. This has led to a debate on whether MFIs, whose core mission is to support productive purposes, should offer consumer credit. The paper states that:

• Productive loans are not always adequate to fight multiple dimensions of poverty;
• Variety of financial services is necessary to serve the needs of entrepreneurs, households and salaried workers;
• MFIs should be able to offer to their clients the whole range of financial products, including consumer credit, while concentrating on microlending as their core activity;
• MFIs that get into consumer lending should have transparent product management and adequate risk management systems in place.

The apparent similarity between microcredit and consumer lending have led to instances where the two credit forms have been blended. Careless handling of the two types of credit, however, poses a reputational risk for microfinance as a poverty reduction tool. In order to mitigate such risk, risk management should be established at MFI, regulatory and client levels.