Abstract

The field of microfinance emerged in the developing world as a vehicle to provide financial services to poor segments of population is gradually being seen as a profitable business opportunity. In the initial stages of development, these activities were perceived to be done with a service agenda. As the micro finance institutions (MFIs) began to mature, they started facing performance dilemma, and focus is gradually shifted towards profitability.
In order to improve profitability of MFI, interest rate on loan is kept at a very high level and additional costs in the form of margin money, compulsory savings and insurance premium are being imposed to borrowers. Majority of MFI borrowers are poor and illiterate and they are not expected to understand and realise various financial jargons used by MFIs and their effective cost.
To help poor to understand true cost of loan MFI should disclose effective interest rate to the borrowers. Hiding effective interest rate to poor and illiterate borrowers by using “creative” accounting practices is highly unethical. Many MFIs simply state that they charge only 15% flat rate of interest. But the effective interest rate including processing fee, compulsory savings, etc goes well over 100% per annum. 

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