MFI's Extortionate Interest Rates ... up to 58% !

[Guest]

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[Diane R]

She knew her loan would be public and was delighted with the publicity and the idea that people all around the country and around the world were helping her.

Netherlands, Switzerland, Denmark, UK, Canada, Australia, Germany, Romania, Norway, Sweden, and France, in addition to all over the USA, as of this writing.   

Thanks for your additional first-hand input, Good Dogg (and I am drooling at the description of Good Pupp's dinner, yum!).  I'm willing to bet that you probably wouldn't have been such an early customer of Toni's Southern Kitchen if you hadn't heard about it on Kiva; if I'm right, she got some good publicity from posting her loan!  And David, very good point about returning borrowers around the world, it's another good data point.

--Diane.

[Visitor Number 1]

For 20% she could use her Mastercard instead.

Once again, there is the assumption that any borrower living in the US can qualify for a Mastercard.  In this economic climate, it is now even harder to qualifiy for a major credit card.  In addition, even if one qualifies for a Mastercard who is to say that a specific borrower qualifies for one that comes with an Annual Percentage Rate of 20% or less?

Should one put a business loan on a Mastercard and pay off the amount with only minimum payments the APR could well exceed 100% over the payback period.  Many entrepreneurs are making good use of loans from ACCION and Opportunity Fund because they do not qualify for credit cards or commerical bank loans. 

PLEASE be careful in making these assumptions!

[JohnAtKiva]

Streetcred -

I spent an hour on the phone this week with Bernard McGraw, an ACCION Texas-Louisiana borrower:
http://www.kiva.org/lend/240241

He had an amazing life story.  He was forced to abandon his home in New Orleans after Hurricane Katrina, and started fresh with a new business in San Antonio - a restaurant.  After building up his business for four years or so, he applied for a bank loan to expand his business.  They rejected him, but encouraged him to consider microcredit.  He discovered ACCION Texas-Louisiana and applied for a loan.

He told me that last Thursday, he got a notice from his bank that his house in New Orleans had been foreclosed upon.  Then on Friday — the very next day — he heard that ACCION Texas-Louisiana had approved his loan.  He was completely shocked and thrilled!  I could hear his excitement as we talked on the phone.

Bernard was able to expand his restaurant and hire more employees, because of the loan he received from ACCION Texas-Louisiana.  It was a very exciting moment in my time at Kiva, because I could hear from his description how his microloan was changing his life.  As a lender (let alone a member of the Kiva team), you live for these moments.  Bernard hadn't been able to get access to capital through a bank, and had no credit - in fact, he had no collateral either (as his house had been foreclosed upon the day before he was approved for his microloan).  He got his credit based on his strength of character and hard work, not based on his credit score or any collateral.  That to me is what the power of microcredit and Kiva is all about.

I am proud of Kiva's association with ACCION Texas-Louisiana.  And by the way, ACCION is not one giant entity - from what I understand, there is a global group (ACCION International) and then there are local affiliates (ACCION USA, ACCION Texas-Louisiana, etc.).  Within the US, ACCION USA provides both oversight and also lends to borrowers on the East Coast.  In any case, it is not accurate to refer to all MFI's affiliated with ACCION as the same microfinance institution.  They have different leadership, each with their own CEO and management teams.

You have had some fair points in the past, and I have tried to be responsive to you.  But I have to ask - have you ever met with or talked to any borrowers from ACCION USA, ACCION Texas-Louisiana, or Opportunity Fund?  Because your comments do not seem to reflect the feedback that I have heard from the borrowers I have met and spoken to.  If you have specific information or feedback to share, I would be happy to hear it.  If you are speculating, that's fine too - but please let me know either way.

Best,
John

[Skimmis]

What are our expectations or beliefs as a lender about the benefits of Microfinance?

1. Our money is made available for the MFI money to lend out that is maybee it wouldnt have otherwise.

2. Our money is a guarantee that can give the borrower a loan he wouldnt get elsewhere.

3. Our money is interest free to the MFI. The guarantee takes away the possibility of loss for the MFI.
As a result, the borrower will/can get a loan with a lower interest.

4. The MFI should run a sustainable business covering its expences, but not make a very large profit.


The question is, how do we achive that the borrowers

1:  gets a loan
2:  at a fair interest / cost

[Skimmis]

http://www.kivafriends.org/index.php/topic,3924.msg83635.html#msg83635

U.S. gives small companies more access to microloans
"The sisters will pay a 10 percent interest rate. The only other way they could have borrowed that money would have been to use a credit card -- at a 29 percent rate, according to their lender, Valley Economic Development Center in Van Nuys, in Southern California."

"The Microloan Program provides small, short-term loans to small business concerns as well as not-for-profit child-care centers. SBA makes funds available to specially designated intermediary lenders, which are nonprofit community-based organizations with experience in lending as well as management and technical assistance; these intermediaries make loans to eligible borrowers. The maximum loan amount is $35,000; the average loan is about $13,000.

How Funds May Be Used
Microloans may be used for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment. Proceeds cannot be used to pay existing debts or to purchase real estate.

Technical Assistance
Each intermediary is required to provide business training and technical assistance to its micro-borrowers. Those applying for microloan financing may be required to fulfill training and/or planning requirements before a loan application is considered.

Terms, Interest Rates, and Fees
Loan terms vary according to the size of the loan, the planned use of funds, the requirements of the intermediary lender, and the needs of the small business borrower. The maximum term allowed for a microloan is six years. Interest rates vary, depending on the intermediary lender and costs to the intermediary from the U.S. Treasury. Generally, these rates will be between 8 and 13 percent.

Collateral
Each intermediary lender has its own lending and credit requirements. Generally, intermediaries require some type of collateral and the personal guarantee of the business owner.

For More Information
Small businesses interested in applying for a microloan should contact an intermediary in their area; all credit decisions are made on the local level. The Microloan Program is available in selected locations in most states.

A list of approved Microloan intermediaries in your area can be found here http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_microloan_intermediary.pdf."

[Skimmis]

From http://www.kivafriends.org/index.php/topic,2685.msg83811.html#msg83811

India's Major Crisis in Microlending
Loans Involving Tiny Amounts of Money Were a Good Idea, but the Explosion of Interest Backfires
http://online.wsj.com/article/SB10001424052702304316404575580663294846100.html?mod=europe_home
"..Microcredit is the lending of tiny amounts of money, usually less than $200, to entrepreneurs who use the loans to start or expand small businesses such as a vegetable stand or a bicycle repair shop. Most microcredit firms lend money through women's groups and reach out to borrowers who are either too far from or too poor to borrow from a bank. The repayment rate on the loans have tended to be better than that of richer borrowers. Interest rates, however, can be high, from 25% to 100% a year, .."

"...As the microfinance industry has grown, it has attracted international capital that has greatly boosted the size of the industry, much as payday lending and subprime borrowing soared until two years ago in the U.S. In a significant move that showed international investors' interest in the industry, SKS recently sold $350 million of its shares on the Indian stock market.

But along with that has come concern among politicians, regulators—and indeed some in the industry—that unfettered expansion was leading to poor lending practices, multiple loans to the same borrowers, and fears of widespread repayment problems.

While they have been much in demand wherever they have been introduced as they provide a kinder, cheaper alternative to the village loan shark, some economists are skeptical about whether the small loans actually help lift people out of poverty.

And in regions where there are more than one microlender competing for clients, some experts are concerned that the poor are being encouraged to take on more debt than they can bear...."


http://unitedprosperity.ning.com/profiles/blogs/visiting-our-next-partner-in-1?xg_source=activity
"... As I learned a little bit more, I also realized that were hardly any financing options for the poor available in Kutch. Other than Prayas no microfinance institutions operates there and most people
have to approach a local money lender in case they need a loan. The money lender terms I found were the most usurious with interest rates in excess of 700%... "

[kurt]

I'll vote for Mongolia loans...

I stumbled over your entry just today - many thanks for this hint, will lend through XacBank!

[Peter S]

Many of the concerns about extortionate interest rates in microfinance that were being expressed in this thread by streetcred seem to be echoed in an upcoming (July 2012) book called Confessions of a Microfinance Heretic: How Microlending Lost Its Way and Betrayed the Poor by Hugh Sinclair.

Part memoir, part financial detective story, and part exposé, this is the account of a microfinance insider who joined the industry in the early 2000s with a newly minted MBA and the intention to do good in the world. But over the course of eight years, he became increasingly disillusioned and alarmed. Eventually he decided to do something about it: he became an anonymous source for The New York Times, providing information for a series of stories that covered an increasing number of microfinance scandals.

The author traveled the world, from Mexico to Mongolia, with Nigeria and Mozambique in between, working for several banks, agencies and institutions. He saw microfinance at all levels, from the first-world banks who called him in the night to hush up negative publicity, to the street vendors whose lives were sometimes transformed by microloans—but all too often were not. Because microcredit is largely unregulated and poorly understood by individual investors the potential for abuse is rampant. And seduced by the high pay-back rate of the loans, banks like DB and Citibank helped push the microfinance sector to bubble-like highs. The author describes his firsthand experiences of the result: rampant corruption, exorbitant interest rates, and microloans leading to fraud, child labor, and even suicide. Much of the book centers on the scandal he uncovered involving the corrupt Nigerian nonprofit LAPO and its dealings with industry darlings Kiva and Triple Jump.

Microfinance can work—the author had direct experience of this too, and lays out the conditions necessary for success. But he authoritatively debunks the myth that putting the poor of the world into debt is always a good idea.

my emphasis there...

About the Author

Hugh Sinclair holds a master's degree in finance and an MBA. He has worked in microfinance since the early 2000s when he joined Grameen Trust. He has since worked in dozens of countries and as a consultant for several investment funds, banks, and NGOs. He has spoken frequently at business schools and microfinance conferences.



Certainly one for Kiva's own library, I'd say.

[wind5001]

This is going straight on my reading list. Thanks for sharing, Peter!

[Skimmis]

Is this a new KIVa MFI scandal ?
http://www.kivafriends.org/index.php/topic,321.msg94027.html#msg94027
http://en.wikipedia.org/wiki/Ponzi_scheme