MFI Interest Rate

[Guest]

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[Phil]

Hi,

A few weeks ago, Kiva used to publish information about the interest rate being charged by each MFI, and how this compared to the local market rate. However, now I notice that this information is no longer being published. Does anyone know why?

This does not help my workmate's skepticism about how much profit some MFIs are making - he is originally from Kenya, and he says that his mother used to work at an extremely money-hungry MFI.

[jaribilen]

From the FAQ at kiva.org

"41.    What are the interest rates the Field Partners charge?
 
We are currently collecting our Field Partner interest rate data, and will make this information available as soon as possible on the individual Field Partners pages."

[AGullen]

Although I don't doubt that some MFI's rip-off their clients, this in general is not in their best interest. Remember, they are not charaties, they are for-profit enterprises. If they consistently run rates that nobody can afford to pay, they won't be making very much now will they? It's not like the people in question have collateral (like a house) that they can easily go after like traditional banks. Another point that people have to keep in mind is that MFI's run a much, much higher per loan administration cost. Whereas banks will loan out $1million to one person (resulting in low admin costs) a microfinance institution might lend this amount out to a few thousand people. They have to file the paper work, keep track of the individuals, collect re-payments, as well as pay the salaries for all the people taking care of these things. They often even provide mandatory business education, as well as other classes. These things should all be kept in mind when looking at MFI interest rates. Don't let it scare your friend away! 

[Phil]

Here's an idea: what if we used the bidding process (as found in sites like Prosper) to ensure that MFI's are charging reasonable interest rates? Ie interest rates that are sufficient to cover their costs, but also competitive compared to other MFIs. This would be applicable in countries/regions where multiple MFIs are able to offer a loan to a borrower.

For example, in Kenya, there are currently 8 MFIs listed. What if the micro-entrepreneur could request a loan, and then each of the MFIs would bid for an interest rate they would be willing to lend at?

An assumption is that micro-entrepreneurs would have access to this information (eg via the internet), however I do remember reading stories about farmers in India using the Internet to know how much they would be able to sell their crops for, so they wouldn't get ripped off so much.

Thoughts?

[Ari]

Good ideas in theory, but way too complicated.  I just trust Kiva to do the work for me.

[Nick]

Hi everybody...I want to throw in my two cents about interest rates from the perspective of the MFI.

First off, it has already been mentioned that the transaction costs for each client is extremely large relative to the income generated from interest payments.  This is especially true for MFIs who provide door-to-door service because the clients cannot afford the time and money it might take to get to the MFI's office.  Even 35% per year on a $500 loan is not all that much considering all the costs that an MFI has to face.

I also want to mention that an MFI, just like a bank, borrows money to then lend out to clients.  Kiva partners have the ability to borrow money at 0%, but they also fund their loan portfolio by accessing commercial lenders.  From what I have seen in Cambodia, the rate they pay on commercial money is somewhere between 8-12% per year.  Considering this fact, an interest rate of 35% really only represents a little over 20% of income generated on the loan.  Kiva makes this spread A LOT larger, but keep in mind that clients listed on Kiva only represent a percentage of the total loan portfolio for an MFI, and the rest is funded by commercial sources.

While some MFIs may make out pretty well at the end of the day, it is a big step away from a village moneylender that may charge 50-100% monthly!

If Kiva decided it should be entirely transparent, perhaps they could list the monthly or yearly interest that each client will be charged along with the other info...

[AGullen]

Here's an idea: what if we used the bidding process (as found in sites like Prosper) to ensure that MFI's are charging reasonable interest rates? Ie interest rates that are sufficient to cover their costs, but also competitive compared to other MFIs. This would be applicable in countries/regions where multiple MFIs are able to offer a loan to a borrower.

For example, in Kenya, there are currently 8 MFIs listed. What if the micro-entrepreneur could request a loan, and then each of the MFIs would bid for an interest rate they would be willing to lend at?

This in essence is what happens in a free-market economy. Since there are 8 MFI's listed just for Kiva.org in Kenya, assuming that clients have access to several of them they will choose the one offering the best rate available. If the MFI rips clients off the customers will jump ship to another institution, or a new MFI will enter the market charging lower rates. I think that with the huge growth in the number of MFI's in service (I think it has tripled in the last decade) the disparity in rates will continue to converge to a point where their profits are just covering costs (i.e. at a market efficient rate).

[pjduncan]

One issue to consider with regard to MFI's and the rates they charge is (as quoted from FAQ)...

"While Kiva.org’s Field Partners do not bear the cost of capital or the cost of default, they do bear transaction costs and currency risk."

That last bit about currency risk is a huge issue.  When you as a lender are expecting a $50 dollar payment from a borrower a year from now, they actually are repaying an amount in their local currency which was equal to $50 at the time the loan was originally made (plus interest).  If the local currency is no longer worth as much compared to US$ a year from now, which is often the case in developing countries without tight inflation controls, the MFI must use part or all of that interest to make up the difference when converting back into dollars.

I would certainly be interested in seeing the rate a particular MFI charges compared to other local market rates.  For any given country it would be hard to say what a "fair" rate is, so the comparison number would be important.  While even non-profit orgs may have employees and founders that make high salaries or receive generous benefits,  at least in the US it is easier to track where the money goes as compared to a for-profit.  Hopefully the Kiva staff is doing a reasonably good job of screening MFI's even as they are obviously focusing on swiftly bringing new ones on while there is such media focus on them...  best wishes with that balancing act Kiva!

[RichardF]

What does this mean?

Average Interest Rate Borrower Pays To Kiva Field Partner:
"The self reported average, annualized, flat interest rate in real terms charged by the Field Partner to the enterpreneur."

Breaking it down, my guesses and questions...

Interest rate charged by the Field Partner to the enterpreneur

• self reported: reported by the MFI, verified?
• average: mean? median? weighted?
• annualized: period converted to one year - annual percentage rate (APR)? effective interest rate (EIR)?
• flat: "interest is calculated on the entire loan amount, rather than on declining balances, and is prorated over the monthly payments"? (see CGAP example below)
• in real terms: (nominal interest rate) - (inflation)?

For now, I'll just say Kiva needs to better define what it's posted interst rates mean.  How they are calculated should be defined.

[RichardF]

For those so inclined, take a look at:

* CGAP. "Microcredit Interest Rates," Occasional Paper No. 1, August 1996. (pdf)
ALTERNATIVE 4 — Flat Interest: Same as Base Case, except that “flat” interest is calculated on the entire loan amount, rather than on declining balances, and is prorated over the four monthly payments.
Compute Cash Flows: Total interest is 120 [1000 x 3% x 4 mos.]. Total principal plus interest is 1120 [1000 + 120], or 280 each month [1120 ¸ 4].
Compute Effective Interest Rate: PV = 1000; PMT = -280; n = 4. Solving for i yields an effective monthly rate of 4.69%, which is multiplied by 12 for an APR of 56.3%. (page 6)

* Wikipedia talk: Kiva - Interest rates: A discussion of questions and criticisms of Kiva's MFI interest rates reporting practices.