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A recent article from the Inter Press Service (IPS), an independent news agency focused on the developing world, reveals Russia’s micro-entrepreneurs and micro-businesses are not receiving the capital they need to grow. The article indicates microfinance institutions (MFIs) are only supplying 15 percent of an estimated USD 8 billion in micro-business demand. Furthermore, formal banking institutions are supplying just 20 percent of the USD 22 billion needed by small and medium-sized enterprises. Continue Reading »

The Reserve Bank of India (RBI), the country’s central bank, has been steadily increasing its interest rates for the past two years. For microfinance institutions (MFIs), a rising interest rate means they must either absorb the costs themselves or apply these higher rates to their clients. Interest rates are a sensitive topic among microfinance borrowers, and many MFIs have tried to avoid or postpone the day when they will have to raise their own rates. However, with RBI’s most recent increase in interest rates, they may no longer have a choice. The microfinance associate, KAS Foundation, of ICICI Bank, India’s second-largest bank, has just announced that it will increase lending rates, and other institutions look to be on the verge of following suit (see story).

Continue reading “MICROCAPITAL STORY: Reserve Bank of India Raises Interest Rates, Forcing Microfinance Institutions to do the same”

The Tanzanian newspaper Daily News recently announced that Tanzania’s National Microfinance Bank (NMB) could be listed on the Dar es Salaam Stock Exchange (DSE) by the end of June of this year. According to the newspaper’s source, the state’s privatization regulation body, the Parastatal Sector Reform Commission (PSRC) is currently evaluating the bank’s bid to go public. The bank should play a significant role in increasing the total capitalization in the DSE.

Continue reading “Tanzanian National Microfinance Bank to Be Listed on Dar es Salaam Stock Exchange by June 2007″

Microcredit Enterprises, a US non-profit which provides loans to microfinance institutions (MFIs), announced in a recent press release that it has altered its lending criteria to focus more on the social impact of potential borrowing MFIs. The organization will change its investment strategy to one which is more oriented towards “MFIs who operate comprehensive social service programs, such as women’s empowerment, health education or business training for micro-entrepreneurs”. It will also focus on those institutions which offer lower interest rates to impoverished borrowers.

Continue reading “Microfinance Lender MicroCredit Enterprises Changes Investment Strategy to Focus on Social Impact”

The National Microfinance Bank of Tanzania (NMB) recently released its financial data for fiscal year 2006. The report stated that before-tax profit for 2006 was USD 31.9 million, a 55% gain over last year’s USD 20.7 million figure. The bank’s CEO, Ben Christiaanse also noted that interest income increased by 55% to USD 49.7 million, non-interest income increased 17%, and customer deposits increased to USD 520 million, up 16%. The bank’s capital to assets ratio rose to 11.3% from 8.5% last year. Shareholders have been paid a total of USD 4 million in 2006.

Continue reading “Tanzania’s National Microfinance Bank Reports Pre-Tax Profit Growth of 55%”

When the National Resistance Movement convened its Parliamentary Caucus meeting on August 7 to discuss the future of microfinance in Uganda, President Yoweri Museveni made it clear to his party that no government money should go to microfinance institutions (MFIs) with “high interest rates.” He also ordered ministers from the Finance Ministry to investigate interest rates charged by MFIs while taking into account the loan recipients, their businesses, and the effect on the national economy. He did make sure to stipulate that microfinance loans should be repaid since many loan recipients under a former government start-up capital scheme mistook the money received as a gift. The government has only recovered 358 million (USD $193 thousand) out of 9.433 billion shillings (USD $5.1 million) in loans handed out under the “Entandikwa” scheme.

Continue reading “Ugandan President Attacks High Interest Rates of Microfinance Institutions”

In a paper published by Asian Development Bank (ADB), Nimal A. Fernando offers an explanation into why microcredit interest rates are so high, and what should, and should not be done to address this. The paper, entitled Understanding and Dealing with High Interest Rates on Microcredit, is addressed toward Asian Policymakers who have become increasingly critical of the high interest rates being charged by microfinance institutions (MFIs).

Continue reading “Why are Microfinance Interest Rates so High? Asian Development Bank Paper Explains”

In a recent edition, we covered micro-lending interest rates as a function of transaction costs; and today we present interest rates as a function of default risk. Lenders must charge borrowers additional interest proportionate to risk, and despite the reported high rates of repayment, micro-lending is a risky enterprise.
Continue reading “The Risky Business of Borrower Default in Calculating MicroFinance Interest Rates”

It is often observed that the interest rates charged to borrowers of micro-loans are quite high. According to the United States Federal Reserve Board, the average interest rate charged by commercial banks for a 24-month personal credit loan was 12.22% in the third quarter of 2005. The average annual percentage rate charged on credit card debt was only slightly higher at 12.48% for Q3 05; yet the APR charged for a typical loan by microfinance institutions (MFIs) in India ranged from 20% to 40% (p.4) in 2003. In lesser developed nations such as Indonesia or the Philippines rates reached up to 80% (p.4). These rates are quickly and errantly decried as exorbitant and usurious, when, in fact, they are the product of some of the most fundamental principles of economics and are advantageous not only for the lender, but the borrower as well.
Continue reading “Microfinance Interest Rates as a Function of Transaction Costs”

Microfinance and microcredit are wrought with usury. At the Global Microentrepreneurship Awards, Bangladeshi Finance and Planning Minister M. Saifur Rahman criticized microlenders for charging rates almost three times as much as the rates on loans microlenders receive from commercial banks.

Continue reading “Usurious Rates in Microcredit and Microfinance Abound åö A Thanksgiving Message on Righteous Investing”

Bravo to the Globe for trying to cover the pitfalls of microfinance after all the recent excitement about the
Omidyar $100 million investment via the Tufts endowment. The article rightly points out the very mixed microfinance
record on poverty alleviation.

Continue reading “Boston Globe Warns of Pitfalls after $100m Omidyar MicroFinance Investment via Tufts Endowment”

Peruvian microfinance institutions (MFIs) EDPYME EDYFICAR and EDPYME Crear Arequipa S.A. received $750,000 and $500,000 loans respectively from the Triodos Fair Share Fund.

The Triodos Fair Share private fund—launched by the Netherlands’ Triodos Bank to invest in MFIs that are at least two years old—had an å¥8.2 million portfolio at the end of 2004. MIX Market states that the fund’s loans range from $200,000 to 1 million for a period no more than 5 years, and that there are “usually no formal guarantees.” Interest rates on the loans to MFIs “must be sufficient to cover potential devaluation against the Euro plus to cover costs of 8%.”

With total assets of approximately $50.36 million, EDPYME EDYFICAR provides loans to microentrepreneurs on an individual and group basis while EDPYME Crear Arequipa S.A., with assets totaling approximately $12.52 million, only offers individual loans. In 1997, CARE Peru transformed into EDPYME EDYFICAR. The MFI’s loan portfolio grew from $3.835 million in 1998 to $47.2 million in January 2005. Founded by NGO Habitat Arequipa Siglo XXI in 1992, EDPYME Crear Arequipa’s loan portfolio increased from $1.31 million in 1998 to $10.578 million as of January 2005. EDYPME Crear’s loans range from $100 to $10,000 with “terms between 6 and 24 months.”

Additional Resources

1) Consultative Group to Assist the Poor (CGAP): “Microfinance Capital Markets Update” is the best source for monthly updates on debt and equity deals in microfinance.
2) “Funds: Triodos Fair Share Fund.”
3) “Microfinance and Fair Trade: Triodos Fair Share Fund.”
4) MIX Market: “EDPYME EDYFICAR.”
5) MIX Market: “EDPYME Crear Arequipa S.A.”
6) “EDYPME Crear Arequipa: Financial Data.”
7) “EDYPME EDYFICAR: Financial Data.”
8) MIX Market: “Triodos Fair Share Fund: Fund Instruments.”

The Netherlands headquartered Hivos-Triodos Fund (HTF) recently loaned approximately $650,000 to three Latin American microfinance institutions (MFIs). Peruvian MFIs EDPYME Nueva Vision, with a 2004 year end portfolio of about $3.8 million, and EDPYME Crear Tacna, holding 2004 year end total assets of approximately $7.37 million, received $150,000 and $300,000 respectively, while El Salvadorian MFI Sociedad Cooperativa de Ahorro y Credito AMC de R.L (AMC), with total assets in 2004 of approximately $6.45 million, received $200,000. The three MFIs each direct money to micro-businesses in semi-urban and rural areas within their countries.

The Hivos-Triodos Fund, which was formed out of a joint initiative between the Humanist Institute of Development Cooperation (HIVOS) and Triodos Bank, provides loans to MFIs. MIX Market states that the HTF’s loans range from $150,000 to $1 million for a maximum of five years and there are “usually no formal guarantees required.” “Interest rates must be sufficient enough to cover potential devaluation against the Euro plus to cover minimal costs of 8%.” The fund had a 2004 year end portfolio totaling å¥17 million.

1) Consultative Group to Assist the Poor (CGAP): “Microfinance Capital Markets Update” is the best source for monthly updates on debt and equity deals in microfinance.
2) “Funds: Latin America—Peru.”
3) “Hivos-Triodos Fund Foundation.”
4) “HTF (The Hivos-Triodos Fund).”
5) MIX Market: “EDPYME Crear Tacna (EDPYME Crear Tacna).”
6) “Sociedad Cooperativa de Ahorro y Credito AMC de R.L.”
7) “Funds: Latin America—El Salvador.”
8) MIX Market: “EDPYME Crear Tacna: Financial Data.”
9) MIX Market: “Cooperativa AMC: Financial Data.”
10) “Hivos-Triodos Fund Foundation: Annual Report 2004.”
11) MIX Market: “Hivos-Triodos Fund: Fund Instruments.”

Close to one billion people are slum dwellers (approximately one-sixth the world population), a number, according to the UN Human Settlements Program (UN-HABITAT) that will increase almost 200% by 2030. This provides an enormous market for housing microloans—a huge source of untapped profits—that could alleviate a future crisis by helping with “slum upgrades and slum prevention.” While state-subsidized housing may also be a solution, immediate massive investment in urban shelter and services should be of primary concern and will require the leadership of the private microfinance sector.

Serving the vast pool of housing microloan borrowers are numerous industry players including “urban developers, regulated financial institutions, government agencies, credit cooperatives, NGOs with an urban poverty focus, and MFIs” who provide the housing loan services.

Though conventional mortgages often remain unattainable for the poor, the merging of such traditional housing finance and microenterprise has enabled poor families to improve their homes by building in stages. About 70% of investment in microfinance housing has in fact been utilized in such “incremental building.” An UN-HABITAT report concludes that smaller short-term loans (microloans less than $5000 for one to eight years) prove more feasible to city dwellers who cannot afford long-term loans “favored by mortgage markets.” Housing Improvement Loan Products designed by Peruvian MFI Mibanco, for instance, allows households to finance home improvement projects instead of completely new construction. Besides small shorter-term loans, housing microloan products also typically have flexible repayment systems and require an established trust between borrower and lender instead of houses for collateral. Interest rates, just lower than microenterprise rates, are also sometimes used. These features have contributed to high repayment rates, enabling MFIs and other housing organizations, to achieve a profit and possibly avert the looming crisis of global slums.

1) “World Faces Prospect of Teeming Mega-Slums.”
2) Accion InSight #4: “Building the Homes of the Poor—One Brick at a Time, Housing Improvement Lending at Mibanco.”
3) “Helping to Improve Donor Effectiveness in Microfinance—The Impact of Interest Rate Ceilings on Microfinance.”
4) “A New Approach to Low-Income Housing Finance.”
5) “Helping to Improve Donor Effectiveness in Microfinance—Housing Microfinance.”
6) “Developing Housing Microfinance Products in Latin America.”

Flat interest rates are the current controversy raging on the microfinance community listserv. This is a highly widespread and dubious practice in microfinance. Flat rates cost the borrower more than the standard declining interest rate – but the micro-enterprise owner is often in the dark about this reality. With flat interest rates, each month’s interest is charged on the original amount of the loan. Declining interest rates vary in that interest is charged according to how much of the original loan remains in the borrower’s hands, which shrinks as successive payments are made. Although common in microfinance, flat interest rates are not the banking standard in the developing world, so often when a microfinance institution quotes a 2% monthly interest rate to its customers, the actual rate of interest is much higher. How much higher depends on the term of the loan, but the actual rate can easily be twice as high.

Because clients are often illiterate and financially inexperienced (or too trusting of the local NGO), flat interest rates sound appealing. And in addition to the larger interest payments that come with flat rates, they are easier for microfinance institutions to calculate. For these reasons, flat interest rates have been seized upon, but at the expense of the unsuspecting borrower.

Bottom line: not only are customers deceived, but microfinance institutions that use the standard declining rate are at a significant disadvantage. Equally insidious, microfinance institutions quote these flat rates to donors who fall for the same trick as the micro-enterprise owners.

Not surprisingly, there are plenty of defenders of flat rates in the donor community. The reasons range: "German mortgages are written using flat rates too;" "a top microfinance institution in India, ICICI, uses flat rates;" "small microfinance institutions do not have the infrastructure to calculate declining rates." While all this may be true, it is a well-known fact in the microlending trenches that flat rates deceive customers. Of course, there are many examples of firms responsibly using flat rates, but that is not the point. The point is that your tax and charity dollars are often being used to gouge the global poor.

Additional Resources

1) US Agency for International Development (USAID): "Calculating Effective Interest Rates on Microcredit Loans."
2) Consultative Group to Assist the Poor (CGAP): "Microcredit Interest Rates."3) Information from the Consultative Group to Assist the Poor (CGAP) regarding potential disparity between flat and declining interest rates in terms of annual return on loans