The people borrowing from the MFIs are getting a much better deal than if they were to try and take the loan out from the local banks (or sharks).
The "local bank" consumer interest rate on loans is: 32.8%
The "local bank" micro business interest rate on loans is: 35.5%
... but the MFI micro-loans interest rate is: 58%
<cough><cough> I don't think the MFI is a better deal!
And I'm thinking that while the rate is a bit high, the access to credit at all is a great thing.
But at what cost?
Most of the borrowers don't qualify for "regular' loans from regular banks. Banks aren't going to deal with the impoverished, the folks that need a couple hundred bucks, etc.
Fair point... but there is a reason why they don't lend to the impoverished: they can't afford to pay it back. MFIs are criticised for a similar reason: that they don't loan to the very poor but only to those who can afford to repay. And of course, MFIs don't lend to the impoverished for similar reasons as the banks.
They are in the business of lending bigger amounts to bigger business with credit ratings and such.
Not really - see my post above where Peruvian bank rates are detailed for "commercial loans", "consumer loans" and "micro business loans".
The old vicious cycle of having to have money to borrow money. The folks that a loan would do the most good aren't able to get one.
Not sure I buy this one. None of the borrowers I've seen so far on Kiva fall into the category of not having money.
Plus, in a lot of countries,the MFIs are willing to lend to women, while the traditional lenders are not. Places like Tanzania, women don't have the same property rights and financial rights as men, so the banks won't lend to them at all, but the MFIs do. So while it's a higher rate than a man would pay at a regular bank, for a Tanzanian woman, even the higher rate loan offers an opportunity that she would have not been offered at all at any rate elsewhere.
Another fair point; not sure whether it applies in Peru... I'll do some more digging.
And if the person's business succeeds and grows and they prove their credit worthiness either through the assets and track record of their business itself or through their history of being good borrowers from the MFI, they can improve their access to "regular" banking channels.
A good point, but at what cost? 58% annual interest (and to address an earlier poster's average length of loan/average size of loan issues, the one I was looking at did run for the full 12 months at an interest rate of 58% and was ~$1,000 amount).
While they're starting or growing their business through money from an MFI, the rate may be a bit high, but eventually it'll help them establish themselves enough to get a much lower, more acceptable by American standards, type rate at a regular bank.
Sounds reasonable except that a "bit high" in this circumstance is 58%. One would expect a relatively high default rate, or delinquency rate at the very least, but the quoted figure for the MFI for both statistics is 0% which seems very hard to believe.
