Young Entrepreneurs in Mwanza

When I heard about young entrepreneurs in Mwanza I was very interested to visit them and find out more about the connection between entrepreneurs and loans. I have often heard that if only there were more money business could be taken to the next level and would become more profitable. My own views differ but I was willing to listen.

Swisscontact had teamed up with a donor on one side and local trainers  on the other side to start a project for unemployed youths.

The Complaints about High Interest Rates

FINCA’s loan officers apparently get a lot of complaints about  high perceived interest rates in Tanzania. Their credits starts at 2.5% interest per month, and depend on loan amount and borrower risk. One of FINCA’s competitors advertises loans with a yearly interest rate of 25%. Short of discussing usury and setting aside culturally influenced notions that an interest should not be paid but rather received (the Swiss national bank is still imposing negative interest rates on large amounts at the time of writing) we may just ask ourselves: What is better for the client?

Why Do They Spend What They Don’t Have?

I grew up with a piggy bank. My generation was told by parents that it is important to save “for bad times”.  When bad times never came and I grew up I started to get a different idea of saving and the value of money. Yet I never considered credit except for buying a home. This one belief is hard to change: “Don’t spend what you don’t have.”

Yet the business model of microfinance institutions (MFIs) is based on the wish

When high interest rates are ok

Purchasing a ticket at a vending machine I thought I didn’t have enough coins so my son lent me one franc. Minutes later I found a franc in another pocket and gave it back to him. But then he asked for interest.

I was taken aback and argued that even the smallest Swiss coin (5 cents) would amount to 5% of what he had given to me. Even worse, the annual interest of a 5-minute credit of 1 franc costing 0.05 francs would be a staggering 525’600%. That’s what I would call “usury”.

However, son pointed out that without his contribution I would not have had a ticket and might have risked a fine of 100 francs. 0.05 francs therefore were more than reasonable to offset the risk. And if I had payed back a week later it would have been only 2’600% annual interest rate.

How does this tie into the world of Microcredit? In fragile condition a medical bill can be more than a family can afford on the spot. That’s when every way is fine to quickly raise money regardless of the cost.

(photo by Howard Lake on flickr)

Usury, no Interest or even Debt Relief?

According to Wikipedia “Usury is the practice of making unethical or immoral monetary loans that unfairly enrich the lender.” Some people went further. Historically, or rather religiously, even taking interest was frowned upon, to say the least. The image above depicts Jesus as he expells the usurars from the temple.

“Thou shalt not give him thy money upon interest, nor give him thy victuals for increase.” (Leviticus 25:37 in the Old Testament)

“And if you lend to those from whom you expect repayment, what credit is that to you? Even sinners lend to sinners, expecting to be repaid in full.” (Luke 6:34 in the New Testament)

“O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed.” (Al-‘Imran 3:130 in the Qur’an)

To sum it up: usury was a no go, interest taking was frowned upon and a call for debt relief was issued in a number of ancient societies.

Debt forgiveness is mentioned in the Book of Leviticus, in which God councils Moses to forgive debts in certain cases every Jubilee year – at the end of the last year of the seven year agricultural cycle or a 49-year cycle, depending on interpretation.

Debt forgiveness was also found in ancient Athens, where in the 6th century BC, the lawmaker Solon instituted a set of laws which canceled all debts and retroactively canceled previous debts that had caused slavery and serfdom, freeing debt slaves and debt serfs.

In addition, the Qur’an supports debt forgiveness:

If the debtor is in difficulty, grant him time till it is easy for him to repay. But, if ye remit it by way of charity, that is best for you if ye only knew. (Qur’an 2:280 )

(Source: Wikipedia)

But how is this related to microfinance? Interest rates lower than from informal moneylenders, suicides of credit defaulters, debt relief are just a few hints.

(photo by lds.org)