Microfinance Institutions (MFIs) in Mexico
By Katherine Chen
If you have never heard of microloans, they are not much different from normal bank loans. Both banks and microfinance institutions both issue loans for a profit by charging interest. The major difference is this: microfinance institutions do not require credit history but instead impose a higher interest rate because of higher risk.
Much debate exists over such institutions—they wear a halo for lending to business owners below the poverty line even though they are in business to make a profit from their clients. This means that they charge abnormally high interest rates—in 2010, the average interest rate for MFIs in Mexico is 74-78%1, which is practically unheard of in traditional banking. As a small business owner, MFIs could be a great stepping stone to launch a business or fund a capital investment, but because of the financial illiteracy and lack of education of many small business owners in Mexico, this stepping stone becomes a crutch. Despite this knowledge, MFIs continue to seek out new clients and keep clients in a continuous loan cycle of high interest rates, which often means that business owners never end up growing their businesses, stop relying on borrowed money, and developing a higher quality of life.
Despite the controversy, MFIs can help business owners develop a credit history.
With good credit history, business owners can receive larger loans with much lower interest rates from traditional banks. With larger loans and lower interest rates, business owners will have more flexibility regarding business ventures and can more easily transition into financial independency. Improving financial literacy in Mexico is a growing process. A few MFIs have tried to incorporate financial literacy classes into the terms of their loans. Although these programs are implemented to aid clients, the programs are often met with general disinterest. Through the years, small business owners have begun to realize the importance of finance and budgeting money. Hopefully, in the future, we will see not see MFIs being widely used as a permanent solution but rather as a temporary tool for business ventures.