Microlending abuse can be stopped

Micro Lending Software

When microlending was first created in the 1980s, it was hailed as a way to help the poor and improve gender equality – many loans were geared towards women – in developing countries. Eventually,  the idea of lending small amounts to credit-less borrowers came to developed countries as well for the same reasons. But recently, microlending has been given a bad rap.

According to a report by the Micro­credit Summit Campaign, microfinance clients decreased this year for the first time since the Campaign began keeping track in 1998. One of the major reasons behind this is the abuse of the form of lending in Andhra Pradesh, India, when for-profit institutions began joining the non-profits that originally began making the loans.

“As the sector grew at a rate of 200 percent per year, other institutions got into the business. Some of them lent more than the clients could afford to repay and used harsh practices to collect,” the Boston Globe reported. Eventually, the Indian government began restricting the lending, and other countries followed.

Sound familiar? This scenario sounds remarkably like the financial crisis of 2008, where short-term lending benefits outweighed the long-term repercussions of faulty lending, eventually causing a similar government intervention and restrictions.

Preventing this in the future

However, there are lessons to be learned and ways to prevent this from happening in the future. With risk management tools such as process automation software, financial institutions can make loans based on data, limiting habits of reckless lending that caused so many unqualified loans to be originated during both the financial crisis and the microlending growth recently. With these tools, lenders – no matter how big or how micro the loans are – can continue to profit and borrowers will not be hurt in the process.

Request a Demo

From loan originations and decisioning, to customer management and beyond, GDS Link helps thousands of clients manage risk while driving growth.