The recent government notice capping interest rates for money lenders brought back the long-shelved debt on the difference between a microfinance institution and a money lender. While some may argue that anyone who lends money is a money lender, it is crucial to understand the fundamental differences between these two entities.
A microfinance institution is a formal financial institution that offers financial services, such as loans and sometimes savings, to low-income individuals or groups who lack access to traditional banking services. These institutions often have a social mission to promote financial inclusion and empower marginalized communities. On the other hand, a money lender is an individual or entity that provides loans to borrowers without a social mission, often at high interest rates and without the formal structure of a financial institution. Money lenders may operate informally and may not always adhere to ethical lending practices.
Key features of microfinance institutions include providing access to a variety of loans and savings products, offering loans at lower interest rates, providing financial literacy training, and having a social mission to empower marginalized communities. On the other hand, money lenders provide quick loans with flexible terms, charge high interest rates, and do not typically offer non-financial services.
In summary, the main differences between a microfinance institution and a money lender lie in their formal structure, social mission, and the terms and conditions under which they provide financial services to borrowers. It is important to consider these distinctions when seeking financial assistance to ensure responsible and ethical lending practices.