Estimating Entrepreneur Interest Rates from Repayment Term Details

[Guest]

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[RichardF]

I was looking at an entrepreneur page when I noticed the Repayment Term details looked like an amortization schedule of principal payments for a fixed payment loan.  It then occurred to me I should be able to estimate the interest rate the borrower actually is paying if I can make a close-enough guess at what the total monthly fixed payment would be (and I assume monthly payments). 

Here's my test case.  My one guess in this exercise was a fixed monthly payment of $100.50.  I started at $100.00 and then moved the amount up or down until the schedule of principal payments for my estimate looked like the schedule of payments on the entrepreneur repayment term details.

Taleh Khashimov

Amortization Calculator
"Almost any data field on this form may be calculated. Enter the appropriate numbers in each slot, leaving blank (or zero) the value that you wish to determine, and then click "Calculate" to update the page."





So, in this example, Taleh Khashimov's interest rate is about 36%.  When I looked for the average interest rate for the Field Partner, Aqroinvest Credit Union, I found the famous "N/A" listed.

In any event, it does appear to me that a lender who is interested in learning more about the interest rate payed by an entrepreneur for a specific loan potentially can do so with the help of a typical interest rate calculator, even when Kiva does not explicitly supply interest rates or interest payment schedules.

(edited for cleaner images)

[Robert]

The loans are granted in local currency while Kiva is repaid in dollars. Forward foreign exchange management is a complex business, so I assume that the MFIs do not create a specific dollar denominated repayment schedule with US interest rates just for repayments to Kiva, but instead copy the loan amortization schedule established in local currency to Kiva, either by using actual exchange rates or by using forward foreign exchange rates. In either case, I believe that the estimated rate of 36% is the rate that the entrepreneur is charged on his loan in Azerbaijani manat.

According to the central bank of the country The National Bank of Azerbaijan the inflation rate approaches 22%. The bank's discount rate is now 12%, oscillating in a corridor between 5% and 19%.

Considering the costs involved with the management of Kiva style loans, I believe that the rate of 36% is very favourable to the entrepreneur.

However, what we are not told is if the entrepreneur has to pay a one-off fee for administrative charges during loan disbursement or a fixed fee for each instalment. Such a fee is of course not mentioned in our repayment plan.

[wthepoo]

Thanks, Richard,

great idea and good job... pity it only works with the (rather few, so far, if my perception is correct) loans that show an amortization schedule like this. Most loans I had a closer look at seemed to pay back fixed amounts of principal per week/fortnight/month (at least from MFI to Kiva).

36% p.a. ... I don't know about inflation in Azerbaijan* (currency risk does not seem to play an important role here because these are already estimated $-values*) but for a $1,200 loan over 15 months, that does sound a bit steep to me. Especially taking into account that Komak from Azerbaijan posts an average interest rate of 3% (don't know, though, if that is with or without inflation compensation...*).

Usually, I don't look too much at the interest figures because I still believe that Kiva would choose their Field Partners also by looking on their mission and vision, and if an MFI that really strives to help the poor without (too much) looking at profits needs to take relatively high interest rates for whatever reasons I am not too bothered, but I may look at Aqroinvest a little less favourably from now on.*

When I looked for the average interest rate for the Field Partner, Aqroinvest Credit Union, I found the famous "N/A" listed.

This reminded me of something I had been wanting to do since Tuesday...

[flann] 11:05 am: There are about 5 MFI partners with NA for interest rates on our site

I wondered whether I just was so "lucky" to always stumble onto these "about 5 MFI partners" - it really felt more to me, so now I went out to count.

Here they are (as of 28 Nov 2008, 11pm CET):

"Active" status

1. Fundación Leon 2000
2. Mekong Plus
3. Ariana Financial Services Joint Stock Company (AFS), a partner of Mercy Corps
4. MLF HUMO
5. HELP Africa
6. Patan Business and Professional Women
7. Aqroinvest Credit Union
8. Iraqi Al-Aman center / Kirkuk
9. Prisma Honduras, S.A.


"Pilot" status

1. Asociación Arariwa
2. Fundación DIACONIA-FRIF
3. Community Economic Ventures, Inc. (CEVI), a partner of VisionFund International
4. ADIM
5. Ahon sa Hirap, Inc. (ASHI)
6. HOPE DRC, a partner of HOPE International


Best wishes,
Wolfgang.


* I see Robert did some research - and yes, I guess his calculation is plausible; this should also mean that Komak's calculation is already inflation adjusted (this bothers me a little as it hints towards potential problems with comparing these interest rates... I don't think all Peruvian MFIs for example adjust their figures for inflation [or do they?]). - So Aqroinvest loans will still get a second or third look from me when they seem to deserve it Thanks Robert!

[RichardF]

Hi guys,

My two real conclusions from this little exercise and your elaborations are:

• Kiva knows more than it tells us about entrepreneur interest rates.
• PA2 falls short on transparency of total costs of loans to entrepreneurs.

[RichardF]

I checked at least one loan from each of the 15 "NA" Field Partners Wolfgang listed and found only one of them, HOPE DRC, a partner of HOPE International, with what looked like a principal payment amortization schedule.  I picked one loan to test an interest rate estimate.

Mohammad Sadiq Hafiz

About the best approximation I could manage for Mohammad Sadiq Hafiz's 18 month loan of $1,075.00 was a monthly payment of $71.40 to match the first payment and $71.90 to match the last payment.  These payments translated to a range of interest rates from 23.4% to 24.4% - or roughly in the ballpark of a 24% interest rate.

[RichardF]

How about this one?  What do you all think I'm goofing up to estimate 32% over the Field Partner's reported average interest rate?

Name: Kurbonhotun Niaytbekova Loan Requested: $825.00 Repayment Term: 8 months Estimated Monthly Payment: $120.00 Estimated Interest Rate: 42% Field Partner: MLF MicroInvest Reported Average Interest Rate: 10.00%

[wthepoo]

How about this one?  What do you all think I'm goofing up to estimate 32% over the Field Partner's reported average interest rate?

Hi Richard,

my best guess is that MLF MicroInvest correct their quoted average interest rate for assumed inflation and assumed currency risk?!

And yes, I think transparency would require more than a bare and average number quoted by the MFIs themselves (and definitely more than "N/A" ); I would really be interested in learning how the interest rates are calculated (probably not on the loan pages or even the main MFI pages because it might get confusing - but maybe in some kind of Fact Book / Partner Database?).

Best wishes, and thanks for continuing to calculate,
Wolfgang.

[RichardF]

Wolfgang,  I still go back to MFTransparency.  Will Kiva ever post complete payment schedules for our entrepreneurs?  What do statements like the following actually mean?

[RichardF] 8:20 pm: What about MFTransparency and Kiva Field Partners reporting to meet their goal of global transparency?
[flann] 8:20 pm: Chuck Waterfield is our colleague
[flann] 8:21 pm: He is the founder of MFTransparency
[flann] 8:21 pm: We support his efforts here

[RichardF]

Here's one that looks like it matches a 30% APR on the nose.

Name: EDITH Loan Requested: $1,000.00 Repayment Term: 24 months (see actual schedule) Estimated Monthly Payment: $55.91 Estimated Interest Rate: 30% Field Partner: Fundación Agrocapital Reported Average Interest Rate: 20.00%