According to a recent article in the Kathmandu Post, Nepalese microfinance institutions (MFIs) that used to borrow from commercial banks at a four percent interest rate now have to borrow at seven percent—a 75 percent increase—due to the liquidity crunch.
Category: Interest Rates
WHO’S WHO IN MICROFINANCE: Compartamos Banco
Compartamos Banco, the largest microfinance bank in Mexico in terms of client base, was founded in Mexico in 1990 as a faith-based non-governmental organization offering microcredit to small businesses.
MICROCAPITAL BRIEF: Interest Rates and Microfinance Debated in “Does Micro Finance Alleviate Poverty? Borrowers Response” Seminar in Dhaka, Bangladesh
Rapport Bangladesh Limited (RBL), a professional management services organization, recently organized a seminar in Dhaka titled “Does Micro Finance Alleviate Poverty? Borrowers Response”.
MICROCAPITAL BRIEF: National Association of Microfinance Banks of Nigeria (NAMB) Seeks Farmers’ “Cooperation” in Microfinance After Interest Rate Complaints
Jude Mathias, the President of the caretaker committee for microfinance institutions (MFIs) for the National Association of Microfinance Banks of Nigeria (NAMB), recently made a request for Nigerian farmers to “cooperate” with the sector’s current standards and regulations.
MICROCAPITAL BRIEF: Uganda Revenue Authority Demands Repayment of Outstanding Stamp Duty on Microfinance Institution Loans
Microfinance institutions (MFIs) in Uganda are being pursued by the Uganda Revenue Authority (URA) to pay outstanding stamp duty fees on their microfinance loans.
MICROCAPITAL BRIEF: Indian MFIs Agree to Voluntary Credit Code Enforced by Microfinance India Network (MFIN) And Take Equity Stake in Credit Information Bureau
At a meeting in Mumbai early this month, a group of thirty Indian microfinance institutions (MFIs) agreed to back a private credit bureau and a voluntary credit code.
MICROCAPITAL BRIEF: Traditional Moneylenders Gain as Microfinance Industry Grows in India
Since its founding in the 1990s by non profit organizations, the Indian microfinance industry has nearly doubled in value by delivering USD 2.5 billion in loans through early 2009. In connection to this rapid growth, government reports have shown an increased market share of traditional moneylenders, which include pawn brokers, gold merchants and other private moneylenders. The traditional Indian moneylending industry charges annual interest rates as high as 120 percent, according to CGAP (Consultative Group to Assist the Poor). A Reserve Bank of India (RBI) survey indicated that in recent years, “traditional moneylenders’ share of total rural Indian household debt grew to 29.6% from 17.5%.” Some academic researchers believe that moneylenders are keeping afloat many microfinance borrowers by acting as stopgaps so that micofinance borrowers can repay prior microloans. The concern is that these borrowers are just digging themselves deeper into debt. However, Padmaja Reddy, managing director of Spandana Foundation, a microlender in India, states that the boom in traditional moneylending represents an increase in “overall demand for credit” and an indication of the untapped market demand for microfinance.
MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Asks Banks For Plans on Financial Inclusion and Criticizes Microfinance Institution Interest Rates
Governor D. Subbarao of the Reserve Bank of India (RBI), which is India’s central bank, stated that all banks will be required to formulate and get RBI approval for “financial inclusion plans” by March 2010. The effort is a part of a wider discussion on whether “financial inclusion” is actually working to integrate poor people into India’s formal financial sector. Governor Subbarao stated that while RBI is “committed” to allowing banks to lead the effort by creating appropriate “financial inclusion plans,” this commitment “is not irrevocable.” At this point, RBI’s participation is limited to approving bank drafted plans and providing support for sharing information, such as best practices and regulatory incentives. Governor Subbarao also acknowledged the role of microfinance institutions (MFIs) in serving India’s unbanked population, however, he criticized the practice of lending at rates of twenty-four percent to thirty percent. Governor Subbarao stated, “Compared to the informal sector, perhaps the rates are lower, but there are questions about whether these rates are affordable. The rate of interest charged should not be out of alignment with the cost of funds, transaction costs, risk costs and a certain margin. In any case, there is a need for transparency….”
MICROCAPITAL BRIEF: Cambodia: Microfinance Loans Up 5%, Non-performing Loans Fall Below 1.5%, But Number of Borrowers Drops 14%
The Cambodian Microfinance Association (CMA) reports that outstanding microfinance loans rose 5.46 percent during the third quarter to USD 448 million at 22 institutions in Cambodia. The data, which covers 21 microfinance institutions plus small loans from ACLEDA Bank, included a drop in non-performing loans by 1.9 percentage points to USD 8.7 million – or 1.48 percent of all loans.
Although total loans increased, the number of borrowers dropped to 883,000, down 14 percent from the previous quarter.
Part of the loan growth was attributed to September interest rate cuts of up to 0.5 percent. Current monthly rates range from 1.5 to 2.8 percent. CMA President Hout Ieng Tong said that, “We forecast that both loan disbursements and non-performing loans will improve in the fourth quarter because it is the harvest season and clients will have money from sales to repay debts.”
MICROCAPITAL.ORG STORY: Bandhan India receives $32m loan from PNB
Bandhan, a microfinance institution (MFI) in Kolkata, India, received a Rs 1.5 billion loan (USD 32 million) loan from Punjab National Bank (PNB). Bandhan plans to add a minimum of 100,000 new borrowers over the next five months. PNB has linked the rate of the loan to its benchmark prime lending rate (BPLR), so the movement in BPLR will affect Bandhan’s cost of funds. Currently the BPLR is at 11 percent. The cost of the loan including a processing fee and operational cost is estimated to be 11.75 percent. The loan will be offered for a three-year period. Bandhan will use the funds to offer micro loans to poor women at 12.5 percent per year. [1]
MICROCAPITAL.ORG STORY: India Goes For Agent Banking – Reserve Bank Of India To Encourage Indian Microfinance Institutions To Adopt ‘Business Correspondent’ Model To Improve Outreach And Relax Requirements On Transaction Reporting
It was recently reported in India’s Economic Times [1] that the central bank, the Reserve Bank of India (RBI) [2] may widen the scope of the ‘Business Correspondent’ model for Indian MFIs following receipt of preliminary feedback from some Indian banks. Under the Business Correspondent model, banks are entitled to engage intermediaries to disburse ‘small value credits’, recover principal and interest payments, collect ‘small value deposits’, sell microinsurance or pension products and receive or deliver ‘small value remittances’ according to information on the RBI website [3]. The intermediaries engaged as Business Correspondents must be ‘well established’ and enjoy a good reputation locally. The idea is for Business Correspondents to improve an MFIs outreach without compromising the quality of services provided to microfinance clients. The RBI has now proposed to ‘unveil new norms for Business Correspondents’ in a way that would relax certain requirements and widen the geographical coverage of many MFIs. The RBI’s aim is to encourage more ‘banks with scattered branches particularly, private and foreign banks’ to adopt the Business Correspondent model. Examples of intermediaries that can be engaged as Business Correspondents include ‘NGOs, farmers’ clubs, cooperatives, community based organisations, IT enabled rural outlets of corporate entities, post offices [and] insurance agents’.
MICROCAPITAL.ORG STORY: CGAP Microfinance Blog Supports Efforts Of MFTransparency To Promote Transparent Pricing And Enhance Consumer Protection In The Microfinance Industry
In a recent posting entitled ‘More transparency, please!’ on the CGAP Microfinance Blog [1] by Mr Christoph Kneiding, a Market Intelligence Officer for CGAP, attention is drawn to the important issue of transparent pricing for microlending products. Whilst jurisdictions such as the United States have legislation such as the Truth in Lending Act of 1968 which obliges lenders to disclose the annual percentage rate (APR) to prospective borrowers for all products, many countries – particularly those with a significant MFI community – do not have a regulatory framework under which transparent loan pricing can be effectively supervised and enforced.
MICROCAPITAL.ORG PAPER WRAP-UP: Do Interest Rates Matter? Credit Demand in the Dhaka Slums, by Rajeev Dehejia, Heather Montgomery & Jonathan Morduch
Written by Rajeev Dehejia, Heather Montgomery & Jonathan Morduch, published in May 2009 in a cooperative effort by the Financial Access Initiative and NYU Wagner School, 41 pages, available at:
http://financialaccess.org/sites/default/files/Do%20Interest%20Rates%20M…
This study attempts to show how sensitive borrowers are to rises in interest rates. It measures the change in overall demand for loans after an increase in the interest rate. The study was done at SafeSave, a credit cooperative in Dhaka, Bangladesh. SafeSave has the convenience of a credit cooperative as the loan officers visit borrower’s homes, but also the flexibility of a bank in terms of repayment schedule within a given month. However, outstanding interest must be paid on a monthly basis. For the study, interest rates were unexpectedly raised from 2 percent per month to 3 percent per month in two branches of SafeSave but not a third branch, which was the control group. The data is from 1999 to 2001, was collected monthly, and 5,147 customers, not all of whom participated throughout the study. Average loan size ranged from USD 48 in the branches that underwent interest rate change, to USD 37 in the branch that did not.
MICROCAPITAL.ORG STORY: Cambodian MFIs Cut Interest Rates: Observations From Phnom Penh-Based MFIs Hattha Kaksekar Limited, Prasac MFT Ltd and CHC Limited
A recent report in the Phnom Penh Post [1] states that microfinance lenders have cut interest rates by 0.2 to 0.5 percent in order to ‘attract customers amid an intensely competitive market’, according to the chairman of the Cambodian Microfinance Association (CMA) [2]. The cut in interest rates comes after Cambodian MFIs were criticised for applying high rates to their clients. Some MFIs stated that these high rates were necessary to cover their costs. According to Mr Hout Ieng Thong who is the CEO of Phnom Penh-based MFI Hattha Kaksekar Limited (Hattha) [3], the rate cut would not adversely affect the profitability of Cambodian MFIs nor expose them to possible bankruptcies. Mr Hout was quoted as stating that Hattha was not able to reduce rates earlier in the year due to operational costs but that they are now able to do so. Hattha reduced their rates from around 3 percent per month to 2.5 percent.
MICROCAPITAL.ORG STORY: Indonesian Government And Central Bank Plans To Cut Interest Rates For Microfinance Loans
In a report by Mr Mustaqim Adamrah in the Jakarta Post entitled ‘Govt, Bank Indonesia seek lower rates for micro loans’ [1], it was stated that the Indonesian government and the central bank of Indonesia, Bank Indonesia [2], will work together to bring down interest rates charged by banks to small businesses to around 13 percent under its microcredit program or ‘KUR’. This move was seen as necessary to help Indonesia’s micro, small and medium enterprises. The article notes that Bank Indonesia recently cut its key base interest rate to 6.5 percent last December. It is not known whether the decision to reduce interest rates under the KUR program is related to this development. The details set out in the Jakarta Post article have yet to be confirmed by other public reports or sources at this stage.
MICROCAPITAL.ORG STORY: Wall Street Journal Reports That While Microfinance Funds Have Previously Paid Off Some Investors Are Concerned About Future Prospects of Microfinance Industry In The Current Economic Downturn
A recent report in the Wall Street Journal [1] entitled ‘For Global Investors, Microfinance Funds Pay Off…So Far’ [2] by Mr Rob Copeland suggests that whilst investments in microfinance funds have proven to be lucrative in the past 12 months, investors are concerned about future prospects in the microfinance sector as a result of the weakened global economy. According to research undertaken by CGAP [3], the USD 30 billion microfinance industry has been expanding its lending at a rate of 40 to 50 percent over the past 5 years. Mr Copeland states that certain microfinance funds have returned 4.47 percent for investors over the past 12 months, according to a benchmark index. Details of the said index were not given. He contrasted these figures with a 22 percent loss as registered by Standard & Poor’s 500-stock index [4], one of the commonly used benchmarks to assess the overall performance of the US stock market.
NEWS WIRE: Microfinancing Money and Talent
Source: NY Times
MICROCAPITAL STORY: State Bank of Pakistan Adds Incentive to Micro Credit Guarantee Facility
The State Bank of Pakistan (SBP) has issued a new circular that it will provide a 25 percent first loss guarantee for loans under its Micro Credit Guarantee Facility (MCGF) to further encourage commercial banks to provide wholesale funds to microfinance institutions (MFIs). The Facility was introduced last December but was met with an unenthusiastic response by banks despite the SBP’s 40 percent principal guarantee on loans. According to the press release in the Daily Times of Pakistan, only one loan has been granted so far under the MCGF. Banks and development finance institutions (DFIs) now will have the option of choosing either the 40 percent principal guarantee (pari passu), or the 25 percent first loss guarantee. The first loss guarantee will cover gaps in repayment of a loan’s principal, up to 25 percent of the principal value of the loan, whereas the 40 percent principal guarantee will cover 40 percent of the actual loss incurred. In essence the first loss guarantee covers a bank’s smaller losses upfront completely, while the 40 percent principal guarantee would require the bank to share in the losses but covers a larger percentage of loss.