To open the two-day conference portion of European Microfinance Week, which is hosted by the 130-member, Luxembourg-based European Microfinance Platform (e-MFP), panelists and attendees addressed “Balancing financial inclusion, market stability and client protection.” Narda Sotomayor, who leads the Department of Microfinance Analysis at Peru’s Superintendencia de Banca, Seguros y Administradoras Privadas de Fondos de Pensiones, stated that “MFIs [microfinance institutions] moving further down market to serve new people is risky, as this group has less financial education, less collateral. An institution’s credit portfolio can deteriorate quickly unless its lending methodology is revised as part of a dynamic process.” On the issue of increasing financial capability, she added, “We find synergies between financial education and stability. This also leads to benefits for institutions and the whole system.”
Much of the discussion centered on government-mandated maximum lending rates. Antonique Koning of the Customers at the Center Initiative of US-based nonprofit CGAP (Consultative Group to Assist the Poor), warned that “there is cost of intervening in the market, so you better be careful.” Dr Sotomayor stated that interest rate caps enacted in the 1980’s in Peru were counterproductive, the results “totally unexpected.” Rather than empowering the poorest quintile of the population, those with more resources schemed to get access to the cheap money. Bun Mony, the CEO of Cambodian microbank Sathapana, stated that the removal of interest rate caps in his country has resulted in more competition, bringing rates down from about 30 percent per annum to 23 percent over the course of several years.
Armenuhi Mkrtchyan, the Head of Consumer Protection and Financial Education Center at the Central Bank of Armenia, argued that it is “usually not true that a regulator can [fix rates] better than the market.” Instead she cited the success of the Armenian government in subsidizing interest rates to bring down the cost of serving vulnerable groups like students and teachers.
Pete Sparreboom, a consultant based in France, argued that one should “not paint all caps the same” citing South Africa as a successful example. In that country, different caps have been established for different products, based on research on the costs of offering each product, leaving the rate cap to function as cap on margins.
Kim Wilson, a fellow at the Council on Emerging Market Enterprises and the Feinstein International Center at US-based Tufts University, argued that interest rate caps in some parts of the United States have been successful because they are high enough for all lenders to cover their costs, while limiting the excessive profits of the “payday” lenders.
Dr Sotomayor added that high interest rates can be a function of inefficiency rather than greed: “The best way to fight inefficiency is to go for transparency and promote competition in that way, so lenders cut the fat. We require institutions to disclose loan costs – reflecting both rates and fees – to allow customers to compare standardized products across institutions. This has resulted in interest rates going down.”
This article is one of a series covering the proceedings of European Microfinance Week, which is taking place in Luxembourg from November 12 to November 14. MicroCapital is reporting on the sessions onsite throughout this time under a sponsorship from e-MFP.
European Microfinance Platform (e-MFP) to Host European Microfinance Week, November 12-14, 2014, With On-site Reporting by MicroCapital
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