Tag Archives: Loans

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. Continue reading Young Entrepreneurs in Mwanza

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? Continue reading The Complaints about High Interest Rates

Microfinance Reality Check

Microfinance promises a lot to many people. It depends on which promise we’re looking at: fight poverty, generate profits, provide financial services to the poorest, empower women, support entrepreneurs and create jobs.  Each has its own merits and each only provides a sliver of the “truth”. 

Take “fight poverty”. Only 50% of the loans are productive to start with. The other half don’t generate revenues and are used to buy food, pay school fees or medical bills. Obviously a non-productive loan is not considered a success in the narrow sense. But looking at the broader picture it might make sense to provide financial means to smoothen the income of the poor. And from an entirely different angle it is somewhat surprising that the poor repay their debts more easily than they save money beforehand.

Then there is the question of whom you ask: practitioners tend to have a more positive view based on anecdotes while quantitative researchers have a hard time proving positive impact and usually have to slice and dice the data to find impact, e.g. among rural female users of productive loans.

The existence of strong competition, market entry of traditional banks, new technologies and favorable regulatory environment all point to a potential success story, where efficient companies produce profits and operate in a sustainable manner.

To summarize: Microfinance services are helping, just not in the way microfinance’s foundational belief system says it does. If few clients actually use microfinance services in the way the original designers of microfinance programs expected them to, that doesn’t mean it is a failure. Microfinance does address the problem of income unpredictability. A stable, reliable source of credit, combined with savings, allows clients to meet their spending needs even as income ebbs and flows.

Hat tip to jaysupetran from Access Advisory for an in depth commentary oft the situation: Microfinance reality check.

(photo by Jovan J on Flickr)

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)