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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.

 

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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.

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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.

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4 Comments

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  1. Bernhard Luecke
    Hi Michael,
    thanks a lot for this clarification. I see this as an eye-opener example for global diversity. The world of interest rates is as different as the world of food, at the end – why should it be different? Look at Brazil, where people see one-digit interest rates for the first time in their life. Look at Spain, where nearly all mortgage loans have variable interest rates.

    You have to see this in a wider context of inflation, the “cost” that the money has for the bank, etc. pp.

    After having lived in Brazil and Spain, I am not shocked at all by a 20% annual interest rate.

    Of course, the best is to bring it further down!

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    1. Michael Schwandt Post author
      Hi Bernhard, thanks for your comment. You are right, we are blessed in Germany by low and fixed interest rates and have forgotten the many other individuals, who still have to fight to survive.

      Beyond that I’m happy about the 1st comment. I’ve hoped for more feedback due to the criticism in the headline.

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  2. Mario Herrera
    Hola Michael.

    Un saludo desde Nicaragua “Maravillosamente Nataural”  por aca solo hablamos Spanish, pero el traductor de google es buenisimo y los resuelve todo.

    Te felicito por iniciar en to blog el tema “tabu” de las tasas interés y su impacto poco efectivo en el mejoramiento economico de los micro y pequeños empresarios y en el algunos caso muy rentables para las IMFs.

    No soy experto en el tema, pero resulta un tanbo rídiculo a 10 años de inicio, crecimiento y desarrollo de la industria microfinanciera, sigan defendiendo u ocultado la ineficiencia operacional y gerencial de la IMF con los  argumentos “más bajo que la usura; alto costo del capital y mas costos operativos”.

    En Nicaragua, actualmente existe un amplio proceso de cierre, fusiones y crisis en la industria microfinanciera, que se ve afectada por la crisis internacional, pero con mayor enfasis por problemas derivados de sus deficiencias operativas, altos costos (Altos salarios y emolumentos a directivos), poca inversión en desarrollar capacidades del personal y especialmente por que hay una total devinculación entre la institución y su principal “activo” que constituyen las 90.000 micro y pequeñas empresas y más de 100.000 pequeñs y medianpo productores del sector rural.

    En el caso de Nicaragua, la mayoría de las IMF esta constituidas como sociedades sin fines de lucro (reducci{on de impuestos); el capital operativo proviene de Programas y proyectos gubernamentales, ONG y organismo internacionales de Cooperación, por lo tanto el capital que obtienen al 10% no implica elevados costos y su tecnología de crédito y oferta de nuevos productos o servicios es poco creativa.

    Las tasas de interés en general se componen de la forma siguiente: 10 al12% capital más 8 a 10% para cubrir costos, más 2-3% trámites legales y desemboslo más 2% administración y seguemiento, más 1% otros más un 3-5% del monto prestado que queda retenido para garantía de pago inicial, en total 30 al 35% anual. A ello se le suma un recargo del 50% sobre la tasa pactada por recargo de mora, etc.

    Como se puede observar, estos prestamos son impagables, si a ello le suman que los plazos de pago son quincenales o mensuales, es decir no permiten que el prestatrio se logre capitalizar o alcance una mejoría en sus ingresos. Esta lógica de mantener al pequeño empresario sin capacidad de crecimiento y/o sin posibilidades de independencia financiera de las IMF, los baquitos la denomina “estrategia de retencíon y7 fidelidad del cliente”.

    Resultado de tasas de interés onerosas 30-35% más un 20% de mora, la mayoría de los pequeños negocios y pequeños productores agrícolas que tambíen sufren los efectos de la crisis mundial, han quedado en mora y han perdido sus viviendas, negocios y fincas por la ejecución de prenda, dado que en Nicaragua la IF y las IMF solo aceptan garantía hipotecarias en una relación US$2.00 x US$1.00 prestado.

    Actualmente has denuncias de corrupción y luchas de poder entre directivos y una creciente ejecución prendaria para recuperar los créditos no pagados.  Por el lado deudores existe un proceso de asociatividad entre los deudores para hacer protestas pública, invasión de oficinas bancarias y demanda ante el poder legislativo para que apruebe una Ley que redusca el abuso en las tasas de interés y detenga las ejecuciones hipotecarias (son miles los prestatarios que han pérdido su casa, negocio o finca). 

    En sintesís algunas IMF en Nicaragua que se constituyeron y se amparan en la Ley de Sociedades Civiles Sin Fines de Lucro, son conocidas como “Instituciones con Fines de Lucro y Sin Ganas de Pérdidas”

    Sin embargo, no to es tan negativo para la industria micro financiera, dado que hay IMF que logrado sobrevivir la crisis financiera recuciendo sus costos operativos, mejorarando su atención al cliente, ofreciendo productos y servivios personalizados, tasas de Interés menores al 20% y especialmente flexibilidad en los pagos y renegociación de plazos para cancelar las deudas. 

    Entre las IMF que han logrado sobrevivir destacan las Cooperativas de Ahorro y Crédito y las ONG u OPD, lo cual demuestra que es factible contribuir al desarrollo y obtener ganancias m{as por volumen de los créditos que por las tasas de interés.

    Finalmente, El Gobierno de Nicaragua, bajo el mandato del Presidente Daniel Ortega (FSLN), promueve y facilita la ejecucución de dos programas denominados Hambre cero y Usura Cero, atendiendo a más de 40.000 micro y pequeños empresarios urbanos y rurales, con amplio enfoque de género, que han recibido en dos años créditos entre US$ 300 y US$5.000 c/u y que han demostrado alta capacidad de pago. La institucón que ejecuta el programa Usura Cero, muestra en sus informes índicadores de Mora y cartera bejo riesgo por el orden del 6% al 7% anaual.

    El secreto para que los micro y pequeños  empresarios cumplan sus compromisos de crédito con el programa usura cero, radica en la tasa de interés del 4% anual, facilidades de acceso al financiamiento y atención persoanlizada.

    Los defensores de la ineficiencias gerenciales de las IMF en Nicaragua aducen que el gobierno no paga intereses por el capital y por lo tanto pueden regalar el crédito. Sin embargo, la gran diferencia entre las tasas de interes 4% y 35% que aplica el programa usura cero y las IMF, es resultado de reduccion de costos y mejor eficiencia y eficiacia en los productos y servicios ofertados. 

    Por ejemplo en las IMF los directivos y alta gerencia devegan salarios por el orden de US$4.000 a U$5.000 por mes, mientras que en las estructura de gobierno el salario más alto le corresponde al Presidente de Nicaragua con ingresos de US$3.000 mensuales, por lo tanto puede deducirse que los funcionarios del programa ususra cero, ganan un 33% del salario presidencial. Los otros factores que afectan los altos costos operativos de las IFM se pueden comprender por ete simple ejemplo.

    Deseo concluir con una frase que resume la percepción que tenemos los Nicaraguenses. “Existen tres formas de ser millonario; Ser banquero  o ladrón se saco y corbata; Vender drogas o ganarse el premio mayor de la loteria nacional”.

    Saludos y disculpas a los lectores que se den por aludidos.

    Mardam
    mjherrera.cidep@gmail.com

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  3. Anna Somos Krishnan
    Dear Michael and SAP Community Members,

    As a development professional working in the world’s largest microfinance market in India, I felt an urge to add some comments to the interest rate debate.

    The interest rates in microfinance spurred a lot of controversy so far but I feel somehow that we are not communicating the whole picture, leaving the novices to this discipline with only partial source of information.

    The first question is: is the MFI (microfinance institution) a commercial or a social entity? If the prior, they need to charge as high interest rates as it allows them to be sustainable plus to cover their expansion costs and the largest chuck of their costs, which is the cost of borrowing (the funds they have to borrow from commercial banks in order to lend it to their clients), in some places like in India it is as high as 12% annually. If the organization is more socially oriented, they would have access to “soft funds” which is donations, grants etc, which allows them to lower the interest rates. However, in the latter model the institutional growth is limited given the limited availability of “charity money” in this Universe.

    Another issue is whether the MFI can finance the lending from the savings of the borrowers. In India, where the banking and the financial sector is heavily regulated  commercial MFIs are not allowed to take deposits from their clients, which means that they cannot lower the interest rates by deploying some or all deposits of the clients to the loan portfolio. Additionally each MFI needs to have a 1-2% loan loss provision to cover the cases of client defaults. This is also carved out of the interest rates.

    With regards to the overhead and admin cost of the MFIs, I think the world slowly understands that sustainable development needs professionals (preferably locals in each developing country) to guide the microfinance other development activity, which makes the largest part of the personnel’s cost (usually 11-12%). There is often a misconception amongst donors, that the NGO staff should work for free just because they chose a legal format which says non-profit. Notwithstanding, the cost of delivering the service is high in microfinance because the low-income borrowers are usually cash needy, so the transactions are also cash-based. We cannot deploy credit cards or cheque given the remoteness of the geographies and the lack of available technology in these areas. As opposed to traditional banking, microfinance has a weekly or biweekly client contact (based on the cash flows of the microenterprises), which is again increasing the cost of service delivery.

    Lastly, if we consider the borrower’s angle, we realize quickly why a 20-26% diminishing interest rate (see the sum of the above numbers) is NOT causing a discontent among the clients. First of all the average return of investment on a small loan (for the borrower) is around 100%, irrespective of what enterprise they are running. You might ask ‘how so high’? Because the microfinance clients are part of the informal economy , they do not pay taxes, they employ their family members and they usually run the enterprises out of their homes. If you have a 100% return, you don’t mind paying 26% for a reliable financial services provider especially, if the only alternative you have is the money lender.

    Having said all the above, it is our duty (those who work in the microfinance and social development space) to ensure that organizations understand the difference between financial sustainability (i.e. covering your cost and organizational growth) and shameless profit making on the back of the poor. It is also our duty to draw the attention of the donors what responsible lending and accountability means and what are the minimum transparency and corporate governance standards that MFIs. I must admit that this has proven to be the most challenging part of our work, given the greed and questionable practices of some of the largest financial institutions of the Western World.

    I apologize for this long posting but I find it important to present the whole picture and get the message across that poor clients need opportunities, reliable service quality and not sympathy. Currently, sustainable microfinance ensures that. I welcome all your further questions and comments.

    Warm regards,

    Anna

    Executive Director
    PlaNet Finance India

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