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Does it pay to provide 'soft loans'?

Summary: Professor Badr El Din A. Ibrahim, President of the Microfinance Unit at the Central Bank of Sudan, explores how the model can work

There are many microfinance misconceptions. Among these is the idea that it is necessary to provide subsidised (soft) credit to un(der)- bankable microfinance clients. This misconception affects clients, microfinance providers and, more generally, the sustainability of the microfinance sector itself. Subsidised credit policy is a short-term policy, as subsidies, when granted, need to stop in the near future whether it is successful or not.

No doubt the subsidy approach to microfinance is not a long-term strategy, it is also dangerous to sustainability and ineffective; instead we call for a full market-oriented microfinance lending that creates sustainable institutions to cater to an ongoing need to fund economically active microfinance clients.


The Islamic microfinance sector has witnessed achievements, yet its global spread is very weak. The experiments in Islamic microfinance, except the limited banking experiments, were based on a number of models and mechanisms and were not integrated into the financial system as same are undergoing the trials phase, being set up by donors or religious groups and have yet to develop like their conventional counterparts particularly in volume and type.

Programmes of Islamic microfinance use funds of Sadagat, Waqf, and Zakat, and most of the development of the Islamic microfinance programmes worldwide have till to date been financed through donors and government subsidised resources. This gave the impression that Islamic microfinance should be carried on subsidy and only outside the banking system.


The historical development of Islamic MF in Sudan (and elsewhere), I believe are neither clearly studied and fully understood in theory, nor in practice by many; this despite the successes, the potential and the goals and mechanisms, of Islamic MF as sustainable, market-oriented, poverty reduction and development aiding instrument.

That is partly why there are still missing issues and Sudan financial inclusion is, unfortunately, below the international average of developing countries. The reason is mainly related to subsidised loans. These loans (in addition to capital erosion in the case of high inflation rates) will damage the profitability of the lending institutions without adding substantial benefits to the financial position of microfinance clients. Moreover, subsidised loans are not required given the high rate of profit of capital in small enterprises. Subsidised policies leads to financially un-disciplined clients, and do not encourage to pay back loans. Moreover, subsidised lending distinct between borrowers and distort micro lending markets. Finally, subsidised loans limit private sector entry into the microfinance market (both retail and wholesale markets).


I suggest limiting all types of support for enterprises to the minimum and ensuring full or partial contributions from clients themselves, such as through support awareness programmes, providing wide and suitable options for guarantees. Moreover, marketing support can be given without fees. All in all, supports to clients can include all types of support except subsidised credit. Moreover, soft loans and market-based loans should not be in one lending institution. However, we need to correct misconceptions and build microfinance sector in accordance with known international best practices that are market-oriented.

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Publication:Banker Africa
Date:Jun 30, 2015
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