The low interest rate that some microfinance companies purport to charge, sometimes as little as five or eight per cent, is a calculated gimmick that has caused many unsuspecting clients more harm than good, Economic Tribune has established.

This is contrary to the wishes of the World Bank and other donor agencies that lend billions of dollars to enable microfinance service providers dish out soft economic empowerment loans.

Some clients of microfinance companies interviewed regretted joining the microfinance schemes, saying what had at first seemed a good prospect of extricating themselves from abject poverty, ended in misery after losing valuable property.

Economic Tribune’s investigative team that set out on a one-week mission into the world of microfinance concluded that most of the highly-publicized soft terms that lured many people into joining the schemes are cosmetic. The team visited a number of such institutions and interviewed a number of clients.

Customers interviewed by our investigative team talked of several hidden costs that when finally computed made them pay more than what they bargained for. They also talked about constant harassment by officials from the microfinance companies on the event of failing to honour their repayment schedules.

Microfinance companies are for instance charging their customers an interest rate of between 4.5 per cent and three per cent, excluding processing fees and other hidden costs.

“Most of the microfinance companies are just in the country to rip us off. Can’t you see everybody wants to set up one? I have fallen victim to one of them and my valuable assets have been confiscated. I couldn’t finish repaying the loan because of the hidden cost,” Mr Daniel Kutor, a civil servant lamented.

Economic Tribune came across rooms full of various electronic items, including TV and radio sets, refrigerators, music systems, sewing machines and beds and mattresses that have been confiscated from clients who were unable to pay on time.

The story of Mr Kutor was not different from the other Ghanaians who patronize the services of microfinance companies. There is a sad story of a widow who borrowed money from one of the microfinance companies (name withheld) to carry on with her dead husband’s project only to find she could not repay the eight per cent monthly interest imposed by her lenders above the five per cent initially agreed upon.

“My brother, I have regretted taking the loan from this company,” the widow, Eva Asiedu, lamented.

Low-income earners and the poor are not the only victims. Well-to-do business people are crying foul as well. Most of them have lost their property, including posh vehicles, after being lured to the loan schemes that promised ‘heavens’ in terms of affordable and low interest rates, only to end up being charged exorbitant interest rates.

When reached for comment, Mr Steve Andrea, a financial expert with JP Financial Consult in the US, told Economic Tribune that microfinance companies cash in on financial management ignorance among borrowers who seemed not to have taken their time to study the loan terms.

“Borrowers are undoubtedly lured by money lenders who talk sweetly to them, setting low interest rates of between five and eight per cent. No one remembers that five per cent a month is equivalent to 60 per cent annually,” Mr Andrea pointed out.

“I am aware that some people are undergoing a life of deep misery after borrowing money that they could not afford to repay due to the exorbitantly high interest rates. This is rather absurd,” he noted.

Asked why Microfinance companies attach people’s property to the deals, a CEO of one of Microfinance institutions, who pleaded anonymity said previous experience has taught them ‘a lesson’.

“Initially, we accepted vehicle cards and land title deeds but some untrustworthy clients sold their property, changed ownership documents and disappeared. Under such circumstances, we had no other option but to attach property,” he concluded.

Mayada El-Zoghbi, Senior Microfinance Specialist at CGAP said international funding for microfinance reached at least $25 billion in 2011. The total amount committed has increased over the past five years, though at a slower rate in the last two years.