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
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 Continue reading Why Do They Spend What They Don’t Have?
Let me make a proper introduction first. This is Tanzanian style. Always ask “How are you?” first, follow suite and get to the point only after having heard “Welcome!” If you can’t wait to read how my day was, kindly jump to the bottom.
FINCA stands for the Foundation for International Community Assistance. John Hatch conceived “Village Banking” in 1984. His plan enabled poor Bolivian farmers with no collateral to access loans through a collective guarantee. In 1985 Hatch established FINCA. Continue reading How was my First Day with FINCA Tanzania?
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)
Prudential CEO Tidjane Thiam on private sector investments in Africa
“There is enough savings in Africa to fund what needs to be done. What’s not happening is intermediation. Turning those savings into productive investments in the economy to create jobs”
source: youtube, excerpt from WEF 2014