Emergency Loans: The Other Side Of Microcredit
Churchill, C.
Journal: Finance For The Poor, 4(3): 1-7
Publication Date: Sep 2003
Published by: Asian Development Bank (ADB)
Document Type: Journal Article
Why should the microfinance institutions offer emergency loans?
This paper discusses that considering the needs of poorest households, emergency loans are as important as productive loans. This article attempts to correct the imbalance by explaining why microfinance institutions (MFIs) do not offer /should offer such services.
The paper proceeds by describing the emergency loan as a small amount of money that allows low-income persons to cope with peculiar risks and urgent, unexpected needs for cash. As per the paper, among the many reasons why MFIs are reticent in offering such loans are:
- Perceived credit risk associated with non-productive loans;
- No synchronization with group methodologies of lending;
- Active dissuasion from policymakers;
- General policy of not allowing clients more than one loan outstanding at a time;
- Delivery systems not geared to provide such service.
The paper argues that MFIs should offer emergency loans since they:
- Complement micro enterprise loans by providing safety nets to low-income households to resist the downward pressures of economic stresses;
- Are a relatively simple service that MFIs can develop;
- Provide varied loan products:
- Diversify MFI’s credit risk;
- Enlarge market;
- Increase profitability;
- Generate customer loyalty.
Finally, the paper describes different options for designing emergency loans and assesses their strengths and weaknesses. The author concludes by highlighting the most important challenge - to overcome the prejudice against the provision of consumption loans to the poor.
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