Interest rates

[Guest]

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[hai]

Interesting discussion. It would be interesting to see a rate comparison chart for all field partners, the inflation rate and the best guesses for the local sharks.

Thank you all for a very informative discussion.

I'm new to this microfinance thing but I think when the supply of capital goes up (meaning kiva does well with our support here) then the interest rate wll go down at some point. Hopefully there will be some competition between MFIs and as they realize they can rely on a stable source of capital, especially at 0% interest rate and as they gain more efficiency in processing their loans, the local folks will benefit from all this. It will be a win-win for everybody.

I hope all the kiva supporters here realize that  this "revolutionary" concept will change the lifes of many, many people in those parts of the world, much more than any foreign aid programs can do.

For one thing, the local loan sharks will have serious competition and as more and more local folks hear about kiva, these loan sharks will either have to lower their rate to match the ones from kiva-associated MFIs or they can only do business with the folks that do not meet the qualifications set by the MFIs.

I can only say that the impact on the local folks will be very, very significant (even when the interest rates seem to be high by western standards).

hai

[miGIRLS]

One purpose of international micro-lending is to make loans that do not have outrageous interest rates. When I see a Kiva partner charging an average of 24% interest, that does not seem right. The delay of time between funding and the transfer to the borrower could be an opportunity for the partner to generate a little income. That is for Kiva.org to analyze when they audit and review prospective and established lenders.

[Ari]

24% is actually not high, especially compared to what else is on offer to the people seeking loans.  Local "loan sharks" often charge hundreds of percent interest rate.  The MFI also have to make money off of the loans in order to be self sustaining.   There used to be a good explanation about this on the Kiva site but I can't find it now...

[RichardF]

Try Why are microcredit interest rates so high?

Ah, if we only had a Site Map! 

[Vermonter]

When I see a Kiva partner charging an average of 24% interest, that does not seem right.

The information is available, there are MFI's who charge no interest, you could just avoid the MFI's that charge interest and only support the MFI's you like.

[AccountAbility]

I suppose you could avoid lending through an MFI if it charges interest, but you then would not be supporting the whole concept of self supporting lending partners.  The expense has to be covered somehow, and for the good of the developing country it is important that these become self sustaining.  Don't look at interest as a bad thing--the question is whether it is reasonable and whether the lender itself is doing a good thing with its interest income, like employing local folks, expanding its base so it can make more micro-loans and so forth.  24% might actually work out to be no interest if the inflation rate in that country is 24%--which is not unheard of.

[miGIRLS]

The link to the "Why are microcredit interest rates so high?" on Kiva.org was helpful. AccountAbility's reference to a country's inflation rate was great info. Surprisingly, Kiva.org does not mention inflation as an interest-rate factor.

Personal note to AccountAbility - the San Juans are my favorite vacation spot!

[BenElberger]

Hey Guys,

This is Ben, Microfinance Partnerships Manager at Kiva.org.  We're working on the interest rate info as we speak but one thing to note is that all rates should be "real".  In other words, we've adjusted for inflation.

Ben

[miGIRLS]

Thanks Ben.

Are you saying that if an MFI data shows the interest rate charged as 5 percent, that is an adjusted number. For example, if inflation is 20 percent, the MFI is actually charging 25 percent?

If I have that mixed up, could you elaborate a little and provide an example, please?

THANKS!

[BenElberger]

Yep, that's correct.  Having said that, it's not entirely accurate to just deduct the inflation rate.  Since entrepreneurs pay back monthly, not all of the repayments are deflated by the annual inflation rate.  The first monthly payment needs to be deflated by 1/12 of the annual inflation rate, the second monthly payment by 2/12, etc.

This is one of the problems with the current rates and they should be MUCH more accurate in a week or two.

Ben