You all might have read about the New SAP Community PlaNet Finance Program to Benefit Under-served Markets between SAP & Planet Finance and have expected many positive things to happen. Amongst various joint projects we identified an opportunity for us (SCN & Community) to support these efforts. The first mission has been to improve the ‘Simple Loan Tracking Solution’ for local MFIs and to evolve it to the next level. As the current solution is based on excel we / the community immediately recognized the very high interest rates.
We immediately got comments like these:
- “I really don’t feel that I’d be ‘giving’ to charity on this and I doubt my company would either”
- “Building software for a non-profit is easy to get approval on but this looks like a business making money?”
- “20% interest, kind of wrong to loan someone with nothing money then demand so much back?”and ended up with almost no community.
Using Google then brought up lots of results to those questions – many of them being discussions from people, who seemed to have the same problem / question like us.
Some phone calls with Planet Finance and other folks + more investigations in Internet resulted in some more distinctness.
The main argument provided by the people we interviewed is the need for Microfinance institutions to charge interest rates that are high enough to cover all their costs if they want to remain sustainable on the longer term and not to rely on external support.
The problem is that the administrative costs of making a microloan of 100 USD are not lower that those of making a thousand-dollar loan – on the contrary. Interest rates of microfinance institutions are substantially higher than banks but much lower than those of loan sharks, which are often the only alternative that low-income families have in many countries.
However, as the people we interviewed put it, this means that the microfinance industry and its supporters shall increase their efforts to constrain these administrative costs. There are several examples showing that microfinance institutions are able to significantly reduce the interest rates while improving efficiency and leveraging technology. According to the microfinance think tank CGAP, interest rates in the microfinance industry averaged about 28% in 2006, declining by 2.3 % a year since 2003.
The issue of interest rates will be from our side carefully followed-up. If you would like to have more information on this issue, we recommend the following article of CGAP as well as the following presentation.
Whereas technology seems to be one of the main opportunities to reduce transaction costs, we look forward of following this issue very concretely while developing the ‘Simple Loan Tracking Solution’
Craig has talked about this in his Friday morning report and is working with a few SAP colleagues on improving the current solution.
Planet Finance is also committed to provide more details on the interest rates as well on the economic impact for Shea women in Ghana.